Bcom Prince

CHAPTER 1

INTRODUCTION TO ACCOUNTING Contents : 1.0 . Aims and Objectives

1.1. Introduction

1.2. Meaning of Accounting

1.3. Accounting and Book Keeping

1.4. Need for Accounting

1.5. Definition

1.6. Origin of Accounting

1.7. Development in Accounting

1.8. Steps in Accounting

1.9. Objectives of Accounting

1.10. Functions of Accounting

1.11. Classifications of Accounting

1.12. Methods of Accounting

1.13. Types of Accounting

1.14. Groups Interested in Accounting

1.15. Let Us Sum Up

1.16. Lesson End Activities

1.17. Model Answers to check your progress

1.18. References

1.0 Aims and Objectives : In the present chapter we are going to discuss in brief about

· Meaning and definition of accounting

· Meaning and nature of book keeping

· Important of accounting in the modern world

· Various objectives and functions of accounting

· Classifications, methods and types of accounting

· Various groups interested in the accounting statement.

After reading this chapter you should be able to acquire basic working knowledge

about the above mentioned topics.

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17

LESSON 1

INTRODUCTION TO ACCOUNTING

1.1 Introduction :

The word “money” is so important to survive in the human society just like as blood

in the human structure. It is well said that “Nothing is impossible when money is available and nothing is possible when the money is not available”. The source of money is created by way of undertaking a job, engaging in agriculture, business or profession etc. The availability of money is depend upon the manner in which money is expended. This means if a person or business concern is careless in spending money; the day may come when he or it does not have a single rupee.

In other words, the availability of money is not merely depend upon the earning of income but very much depend upon the manner in which the earned income is expended. Thus the proper management of income and expenditures is quite important to survive as well as to grow. It requires preparing and maintaining proper records and books in the systematic manner. For this purpose, a technique or tool named as “accounting” has been in the use since the ancient period.

The paper titled as “Principles of Accountancy” is aimed at educating the students to maintain, prepare and analysis various records in different situations by using universally accepted methods and rules. The present chapter deals with meaning, need, objectives and scope of accounting. 1.2. Meaning of Accounting:

The modern system of accounting is based what is known as the Double Entry principle. Accounting is a science because it has some definite objects to be fulfilled and is an art as it prescribes the process through which the object can be achieved. Non- financial transactions cannot be recorded in accounting, i.e., only transactions of financial nature is the subject –matter of accounting. To be more clear, only those transactions which are expressed in terms of money are recorded. Accounting is an art of recording transactions according to size, nature and type of business transactions – cash transactions, credit transactions, frequent transactions etc. When the recording in journal or subsidiary books is done, they are to be classified by grouping the transactions or entries of one nature at place. This is done by opening accounts in a book called ledger. Then such ledgers are summarized in order to give useful information to the management or interested parties. This is done by preparing trading and profit and loss account and balance sheet of whole accounting record. Finally, it is an art of interpreting the result of the financial transactions and communicating the result thereof. The aspect of interpretation falls under management accounting.

1.3. Accounting and Book keeping:

Book keeping may be defined as the art and science of correctly and systematically recording in the books of account the business transactions of an individual or a concern in a way to show clearly the monetary effect of each such transactions. The work of book-keeping is usually entrusted to junior employees, who maintain various books of accounts, journal, subsidiary books, ledgers etc, can be called as book



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–keepers. The books of original record, by themselves, do not give an idea of the company’s financial position. When one has to make a judgment regarding the financial position of the firm, the information contained in these books has to be analysed and interpreted. 1.4. Need for Accounting: It is common experience of all of us that money must be spent carefully. A firm receives money from certain sources like sale of goods, interest on bank deposits. It has to spend money on a number of items like salary, rent, electricity, water, advertisement. The firm should manage its affairs in such a way as will enable it to receive more than it spends. Otherwise, it will have to meet expenses from the original amount invested by the owner for starting the business. 1.5. Definition:

Accounting is defined as “the art of recording, classifying and summarising in terms of money transactions and events of a financial character and interpreting the results thereof.” 1.6. Origin of Accounting:

Accounting originated to meet the requirements of exchange of goods and commodities. The need for accounting grew in order to serve the transactions of the business world. The origin of accounting cannot be exactly located. The value of money or the use of currency, that now we attach to the goods to-day, was unknown to the people of ancient times when barter system existed. Later, innovation of money facilitated to ease exchange of commodities. The credit transactions necessitated to maintain accounts, and accounting is as old as business itself. Accounting was practiced in India, from ancient time, as is clear from the book Arthahastra written by Kautilya, the Minister of King Chandra Gupta. In 1494, the system of book-keeping was first conceived on scientific line in Venice by Luca Paciolia Franciscan monk. 1.7. Development in Accounting:

Accounting is as old as money itself. In India, chanakya in his, “Arthashastra” has emphasised the existence and need of proper Accounting and Auditing. The modern system of accounting owes its origin to Pacioli who lives in Italy in the 15 th century. Accounting at its initial stage, tried to meet the need of historical and stewardship functions. The conventional accounting principles and practices prove to be insufficient. The advent of Industrial Revolution has resulted in large scale production, cut- throat competition and widening market. Today there is greater need for coordination and control. Accounting day cannot be the same as it used to be about half a century ago. It has becomes a very dynamic subject. At present some of the important specialized branches of accounting which are developed are: Cost Accounting, Management Accounting, Responsibility Accounting, Social Accounting or Macro Accounting, Government Accounting, Inflation Accounting, Mechanized Accounting, Human Resources Accounting etc. Needless to mention that some of the said techniques devised are Standard Costing, Marginal Costing, Budgetary Control, Statistical and Quantitative Techniques, Ratios Accounting, Fund and Cash Flow Analysis etc.



19 (1.8) Steps in Accounting :

Following are the various steps involved in accounting:

i. Recording : Each and every transaction is recorded as and when it occurs in chronological order. Every entry recorded has to be supported by reliable documentary evidence. The method of recording is adjusted according to the size, and nature of business and the type of transactions.

ii. Classification : The classification takes the form of accounts in a separate book called as Ledger. Separate ledger accounts are opened for each expenses , income, property and liability. It useful for the segregation of numerous business transactions into identifiable groups. iii. Summarising : Summarising takes place in the form of trial balance, trading account, profit & loss account and balance sheet which are discussed in detail in the following chapters. iv. Interpretation: It is usually done through flow statements. They are useful in evaluating past performance and providing guidance for future plans and activities. 1.9. Objectives of Accounting:

Following are the objectives for which accounting is aimed at: i. To provides the permanent record. ii. To provides the most effective way to the management for fixing of objectives of the business. iii. To provides the most vital information to the management to preparing budgets. iv. To facilitates the business concern to know the profit or loss for a given period. v. To facilitates to know the soundness of a business concern by providing balance sheet. vi. To enables to prepare a list of customers and suppliers to ascertain amount to be received or paid. vii. To gives opportunities to review the business policies in the light of the past records. viii.To comply with provisions of Companies Act 1956, it is necessary to maintain accounting records. ix. To be useful for business loss, provision of licenses, assessment of taxes etc.,

1.10. Functions of Accounting:

Accounting has the following functions:

i. Function of Book-keeping: The primary functions of accounting relates to recording, classification and summary of financial transactions – journalisation, posting and preparation of final statements. The purpose of this function is to report regularly to the interested parties by means of financial statements. ii. Function of Language: Accounting is the language of business. Various transactions are communicated through accounting. There are many parties. Owners, Creditors, Government, Employees etc., who are interested in knowing the results of the firm and this can be communicated only through accounting. The accounting shows a real and true position of the firm on the business.



20 iii. Function of legality: Auditing is compulsory in case of registered firms. Auditing is not possible without accounting. Thus accounting becomes compulsory to comply with legal requirements. Accounting is a base and with its help various returns, documents, statements etc., are prepared.

iv. Function of management: Decision making programme is greatly assisted by accounting. The managerial function and decision making programmes, without accounting, may mislead. The day-today operations are compares with some pre- determined standard. The various of actual operations with pre – determined standards and their analysis is possible only with the help of accounting. 1.11. Classification of Accounting:

Accounting can be classified into the following categories :

i. Financial Accounting: The main purpose of this type of accounting is to record business transactions in the books of accounts in such a way that operating results for a particular period and financial condition on a particular date can be known for the information of the various persons. ii. Cost Accounting : It relates to the collection, classification, ascertainment of cost and its accounting and cost control relating to the various elements of cost, that is, materials, labour and overheads.

iii. Management Accounting: It relates to the use of accounting data collected with the help of financial accounting and cost accounting for the purpose of policy formulation, planning, control and decision-making by the management. The accounting which is prepared exclusively for the use of management is called management accounting. 1.12. Methods of Accounting:

Following are the three methods of accounting:

i. Cash Basis of Accounting: Under this method, all incomes are considered to be earned when they are actually received in cash. Similarly, expenses are deemed to be incurred only when they are actually paid in cash. In other words, importance is attached to cash receipts and payments but non-cash items, such as outstanding, pre-paid expenses, accrued incomes or income received in advance are ignored. This method is adopted in those concerns where only cash transactions take place. Generally this system is followed by individuals like Doctors, Lawyers, Auditors, Engineers, Brokers, and Small Traders etc. ii. Accrual Basis or Mercantile Basis of Accounting: This method is commonly adopted by business concerns. Incomes are recorded or credited to the period in which they are earned irrespective of the fact whether the same has actually been received or not. Similarly, expenses are charged to the period in which they relate irrespective of the fact that they have actually been paid or not. In other words, all items of incomes and expenditures, both cash items as well as non – cash items such as prepaid expenses, accrued incomes or income received in advance etc, are taken into account. iii. Hybrid or Mixed Basis of Accounting: Under this method, both cash basis and accrual basis are followed. Incomes are recorded on cash basis whereas expenses are taken on accrual basis. The net income is ascertained by matching expenses on accrual basis with income on cash basis. This is the most conservative basis of ascertaining income because all possible



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expenses relating to the period whether actually paid or not are considered whereas income only received in cash in taken into consideration. This system is followed by professional like Doctors, Lawyers, and Chartered Accountants etc., 1.13. Types of Accounting:

There are two systems of accounting namely Single Entry System and Double Entry System.

1.13.1. Single Entry System: The single entry system is not a really a system because in some cases record may be one – sided; and in some other cases no record is maintained at all. It is more appropriate to call it an incomplete system of recording transactions. Double effect of every transaction is ignored and only the accounts relating to suppliers and customers an cash account are found. Thus, the system is incomplete, inaccurate and unscientific system of recording business transactions.

1.13.2. Double Entry System: The modern system of accounting is based on what is known as double entry principle. It refers to that system of book keeping where each transaction is recorded in both of its aspects. viz.i. receiving of the benefit of the transaction and ii. giving away of the benefit of the transaction. For a complete record of transactions, it should be presented in both the accounts. Business transactions affect two aspects of the accounts in the opposite direction. If are account receives a benefit there must be another account to give the benefit. It is like the two sides of a coin. Thus, every transaction involves two accounts, one which gives the benefit of the transactions and another which receives the same.

1.14. Groups Interested in Accounting:

There are a number of parties who are interested in the accounting information relating to business. Because, accounting is the language employed to communicate financial information to the General public. The following are the groups who use the accounting statements:

i. Owners: The owners provide funds or capital for the organisation. They possess curiosity in knowing whether the business is being conducted on sound lines or not and whether the capital is being employed properly or not. Owners, being businessmen, always keep an eye on the returns from the investments. Comparing the accounts of various years helps in getting good pieces of information. Properly kept accounts are good proof in dispute. They determine the amount of goodwill and facilitate in assessing various taxes.

ii. Management: The management of the business is greatly interested in knowing the position of the firm. The accounts are the basis the management can study the merits and demerits of the business activity. Thus, the management is interested in financial accounting to find whether the business carried on is profitable or not. The financial accounting is the “eyes and ears of management and facilitates in drawing future course of action, further expansion etc.,

iii. Creditors: Creditors are the persons who supply goods on credit, or bankers or lenders of money. It is usual that these groups are interested to know the financial soundness before granting credit. The progress and prosperity of the firm, to which credits are extended, are largely watched by creditors from the point of view of security and further credit. Profit and Loss Account and Balance Sheet are nerves centers to know the soundness of the firm.



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iv. Employees: Payment of bonus depends upon the size of profit earned by the firm. The more important point is that the worker expects regular income for the food. The demand for wage rise, bonus, better working conditions etc. depend upon the profitability of the firm and in turn depends upon financial position. For these reasons, this group is interested in accounting.

v. Investors: The prospective investors, who want to invest their money in a firm, of course wish to see the progress and prosperity of the firm, before investing their amount, by going through the financial statements of the firm. This is to safeguard the investments. For this, this group is eager to go through the accounting which enables them to know the safety of investments.

vi. Government: Government keeps a close watch on the firms which yield good amount of profits. The State and Central Governments interested in the financial statements to know the earnings for the purpose of taxation. To compile national accounts the accounting is essential.

vii. Consumers: These groups are interested in getting the goods at reduced price. Therefore, they wish to know the establishment of a proper accounting control, which in turn will reduce to cost of production, in turn less price to be paid by the consumers.

viii. Research Scholars: Accounting information, being a mirror of the financial performance of a business organisation, is of immense value to the research scholar who wants to make a study into the financial operations of a particular firm. To make a study into the financial operations of a particular firm, the research scholar needs detailed accounting information relating to purchase, sales, expenses, cost of materials used, current assets, current liabilities, fixed assets, long – term liabilities and share holders funds which is available in the accounting records maintained by the firm. 1.15. Let Us Sum Up : In this lesson we have discussed

· meaning and objectives of accounting · described functions, types, classification, methods of accounting · learnt about various persons interested in the accounting statement

1.16. Lesson End Activities : 1. What is meant by accounting ? Explain objectives and functions of accounting. 2. What are the three methods of accounting ? 3. What are the three types of accounting? 4. Who are the persons interested in the accounting statements. 5. Write short note on : i. Accounting and Book keeping ii. Cash basis and Merchantile basis iii. Single entry system and Double entry system. 1.17. Model Answers to Check your Progress : Question No. 1. Refer para 1.2. 1.7. 1.8. Question No. 2. Refer para 1.10. Question No. 3. Refer para 1.12. Question No. 4. Refer para (i) 1.2. 1.3. (ii) 1.10.1. 1.10.2. (iii) 1.11.1. 1.11.2. 1.8 References: Financial Accounting – R.L. Gupta – Sultan chand & Sons Advanced Accounting – S.N. Mageswari – Vikas Publishers ***********



22 A

LESSON 2

CONCEPTS AND CONVENTIONS OF ACCOUNTING

Contents :

2.0. Aims and Objectives

2.1. Introduction

2.2. Meaning of Accounting Concept

2.3. Meaning of Accounting Convention

2.4. Let Us Sum Up


2.6. Model Answers to Check your Progress 2.7 References

2.0. Aims and Objectives : In this lesson we are going to learn

· The meaning and various elements of accounting concepts

· Meaning and various elements accounting conventions .



2.1. Introduction:

Accounting is the language of business and information about business is communicated to outsiders through accounting statements. In order to make these statements easily understandable and meaningful, it is necessary that accounting should be based on certain unifrom scientifically laid down norms, which are called accounting principles. The accounting principles are rules of action or a body of doctrine universally adopted while recording the business transactions. Adopting uniform principles in recording the transactions will ensure uniformity, clarity and understanding. If accounting is to serve its purpose more effectively, it should be based on certain unifrom and scientifically laid down principles or postulates, also termed as accounting standards,. The accounting principles can be classified into two categories: 1. Accounting Concepts and 2. Accounting Conventions.



2.2. Meaning of Accounting Concepts :

There are some assumptions on which accounting is based. Accounting is the language of business. Business firms communicate their affairs and financial positions to the outsiders through the medium of accounting, which is the language of business in the form of financial statements,. To make the language convey the same meaning to all interested parties, accountants have agreed on a number of concepts which they try to follow. The meassages so communicated should easily understood by the people for whom it is intended. Accounting concepts can be described as something which signifies a general notion regarding accounting principle. The assumptions, so made, are most natural and are not forced ones. A concept is self-evident proposition i.e., something taken for granted. There is no authoritative list of these concepts.

2.2.1. Business Entity Concept :

Business is treated as separate from the proprietor. This concept is important and implies that a business is separate and distinct from the persons who supplied capital to the firm. All transactions of the business are recorded in the books of the firm. If business affairs and private affairs are mixed, the true picture of the business will not be available. The proprietor is treated as a creditor to the extent of his capital. Capital is thus a liability to the firm and the proprietor is the creditor of the business. The proprietor-sole trader, partners of a partnership firm etc.-may draw amount out of the business and this reduces the liabilty of the firm. Because of this concept, financial position of the business can be easily found out and earning capacity of the firm can be easily ascertained. It is important to note that transactions of the business affairs and private affairs are separated for recording only and in law, no such distinction is recognised except for an incorporated company. 2.2.2. Money Measurment Concept :

Only those transactions, which can be expressed in monetary terms, are recorded in accounting though their quantitative records may also be kept. All business transactions should be expressed only in money. Thus transactions, which cannot be expressed in money, will not be recorded in accounting books. Thus labour-management relations, sales pollicy, labour unrest, effectiveness of competition etc., which are of vital importance to business concept, do not find place in accounting. Another limitation of this concept makes the

24 assumption that the money value is constant. It is contrary to fact as there are fluctuations in the money value. For instance, a land, purchased for Rs 10,000 in 1980, may cost four or five times, in 2007. This because of fall in money value.

2.2.3.. Going Concern Concept: This concept relates with the long life of the business. A business is intended to continue for an indefinitely long period. For all practical purposes, a business firm comes under going concern concept, when there is no evidence to the contrary. All firms that continue to operate on a profitable footing are treated as going concerns. Accordingly, continuity of activity is assumed, thus accounting reports are fashioned as a going concern, just as against liquidation. The current disposal value is irrelevant for a continuing business. Thus under this assumption fixed assets are recorded at original cost and are depreciated in a proper manner, In Balance Sheet market price of fixed assets not considered. While preparing final accounts, recored is made for outstanding expenses and pre-paid expenses with the assumption that the business will continue.



2.2.4. Accounting Period Concept:

Accounting is a continuous process in any business undertaking. Every businessman wants to know the result of his investment and efforts at frequent intervals. Accountants choose some shorter period to measure the result. Therefore, one year has been, generally, accepted as the accounting period. It may be 3 months or 2 years also. This period is called accounting period. Financial period chosen, in this regard, should be neither too long nor too short. Closing day of the accounting period is known as accounting date. At this date, accountant prepares income and position statements, shows the business operations, brings the changes of positions since the construction of last statements. The financial reports prepared facilitate to make good decison, corrective measures, expansion etc. One the basis of income and position statement, financial position and earning capacity of one year can be compared with another. Their comparison helps the business for expansion. The outsiders too draw various conclusions. One year accounting period is recognised by law and the taxation is assessed annually. Reports to the outsiders are provided on this accounting period.

2.2.5. Accrual Concept:

According to this concept the revenue is recognised on its realisation and not on its actual receipt. Similary, the costs are recognised when they are incurred and not when payment is made. This assumption makes it necessary to give certain adjustments in the preparation of income statement regarding revenues and costs. But under cash accounting system, the revenues and costs are recognised only when they are actually received or paid. Hence, the combination of both cash and accural system is preferable to get rid of the limitaions of each system. 2.2.6. Cost Concept: Under this concept, fixed assets are recorded in the account books at the price at which they are acquired. This price paid to acquire the assets is termed as cost and this cost is the basis for all the subsequent accounting for the asset. When an asset is acquired for Rs 5,000, it is recorded in the account books at Rs 5,000 even though the market value may be different. But the asset is shown in balance sheet year after year, at cost price minus depreciation. This value is called book value. It the business pays nothing for an item it acquired, then this will not appear in the accounting records as an asset. Thus, all such events

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are ignored which affect the business but have no cost, for example, a facourable location, a good reputation with its customers, market standing etc. 2.2.7. Reliasation Concept :

This concept revolves around the determination of the point of time when revcenues are earned. A business firm invests money to purchase or manufacture goods for sale. To earn profit, sales have to be made. There can be no profit without realisation of sale proceeds. According to realisation concept, which is also known as the “revenue recognition concept”, revenue is considered as being earned on the date on which is realised i.e., the date on which goods and services are transferred to customers either for cash or for credit. Credit transactions create debtors and the promise of debtors to make payment is sufficient for the purpose of realising revenue. The realisation concept is important in ascertaining the exact profit earned during a period in business concern. This concept is very important as it prevents firms from inflating profits by recording sales and incomes that are likely to accrue.



2.2.8. Dual Aspect Concept :

This concept signifies that every business transaction involves a two-fold aspect a. the yielding of beneift and b. the giving of the beneift. For an exchange of value, two parties are required-a giver and a receiver. Thus, a firm sells goods worth Rs 100, the two simultaneous implications on the seller are i. forgoing goods worth Rs 100 and ii. receipt of cash Rs 100. And those on the purchaser would be i. receipt of goods worth Rs 100 ii. forgoing of cash Rs 100. Every transaction affects two accounts and entials two-fold simultaneous effect on each transaction affects receiving account and giving account equally. Technically speaking, “for every debit, there is a credit”. Therefore, we can say that every debit must have a corresponding credit and vice versa. This is the only system of modern account keeping. The underlying principle of Double Entry is very simple but wonderfully effective. “Double Entry book-keeping is a system of accounting by which receiving and giving aspects of each transaction are recorded at a time”. As such transaction affects giving account and receiving account equally, the assets of a business entity will always be equal to its liabilities i.e.,

Total Assets = Total Liabilities

Total Assets = Capital + Outsiders’ liabilities

Capital = Total Assets - Outsiders’liabilities.

2.2.9. Matching Concept :

According to this concept, it is necessary to match the expenses incurred during the accounting period with the revenues recognised during the same period. Since profit is an excess of revenue over expenses, it becomes necessary to bring together all revenues and expenses pertaining to a particular period. In other words, expenses incurred in an acounting year should be matched with the revenues recognised in that year. Again, only such expenses as incurred in generating revenues during the period should be deducted from those revenues for deriving the amount of income or profit during the period. The object of accounting is that accounting record the made in such a manner that cost may be compared with revenue. If the accounting method does not facilitae the comparison, then accounting method is considered unsatisfactory. Neither receipt of cash for revenue nor payment of cash for expenses is necessary. What is necessary is that they must accrue in the current year so that the incurred expenses are mathched against the realised revenue. American Institute of Certified Public

26 Accountants’ Committee on Accounting Procedue states that “it is plainly desirable to provide, by charging in the current income statement, properly classified, for the foreseeable costs and losses applicable against current revenues, to the extent they can be measured and allocated to fiscal preiod with reasonable approxiamation”. All costs incurred during the period are taken. Similarly, expenses paid in advance are exculded from the total costs incurred to arrive at the expired costs. By application of this concept, proprietor can easily know about the profit or loss and he can make effort to increase earning capacity. 2.2.10. Objectivity Concept: This concept implies that all accounting transactions should be evidenced and supported by business documents i.e., invoices, vochers etc. The evidence substantiating the business transactions should be objective free from the is of the accountant or others. These supporting documents form the basis for record of entries and of audit. Accounting record is based on documentary evidence is readily and objectively verifiable and therefore universally acceptable.



2.3. Meaning of Accounting Convention:

An accounting convention is a common practice which is universally followed in recording and presenting accounting informations of business. They are like customs that are followed in a society. As a society develops its own customs for its day to day work, conventions are devloped by business to facilitate its recording of business transactions in the books of accounts.Conventions help in comparison of accounting data of different business units or of the same unit for different periods. The object is to make accounting data more useful. Following are the accounting conventions in the use: 2.3.1. Convention of Disclosure: The convention requries that accounting statements should be honesty prepared and all significant information should be disclosed therein. That is, while making accountancy records, care should be taken to disclose all material information. Here the emphasis is only on material information and not on immaterial information. This conention assumes greater importance in respect of corporate organisations, where the management is divorced from ownership. That is why forms of Balance sheet and Profit and Loss accounts are prescribed in Schedule VI of the Companies Act, 1956; so that significant information may not be left out to be disclosed. The purpose of this convention is to communicate all material and relevant facts of the financial position and the results of operations, which have material interests to properietor, creditors and investors. Sometimes, there may be time gap between the prearation of Balance Sheet and its publication and if there are material events- bad debts, destruction of plant or machinery etc., which occured in the time gap, may also be known to users- proprietors, creditors etc. In short, full disclosure of all relevent facts in accounts is a necessity in order to make accounting record useful. Therefore, full disclosure is a very healthy convention, and is important.

2.3.2. Convention of Conservatism :

“Anticipate no profit and provide for all possible lossess” is the essence of this convention. Future is uncertain. Fluctuations and uncertainties are not uncommon. Conversatism refers to the policy of choosing the procedure the leads to under-statement as against overstatement of resources and income. The consequences of an error of

27 understatement are likely to be less serious that of an error of overstatement. For example, closing stock is valued at cost or market price whichever is lower. This is a convention of caution or playing safe and is adhered to while preparing financial statements. Showing a position better than what it is, is not permitted. More ever, it is not proper to show a position substantialy worse than what it is. Following are the examples:

(a) The value of an asset should not be overestimated.

(b) The value of a liability should not be underestimated.

(c) The profit should not be overestimated.

(d) The loss should not be underestimated.

2.3.3. Convention of Materiality : American Accounting Association defines the term materiality as “an item should be regarded as material if there is reason to believe that knowledge of it would influence the decision of informed investor.” It refers to the relative importance of an item or event.



Materiality of an item depends on its amount and its nature. Theoretically, all items, large or small, should be treated alike. Materiality convention implies that the economic significance of an item will to some extent affect its accounting treatment. Materiality in its essence is of relative significance. In the sense that some of the unimportant items are either left out or included with other items. For instance, acquisition of items like fountain pen, stapler, pin cushion, punching machine ect, can be treated as part of assets, when considering their durability and span of life. But, it is not necesary to maintain seperate ledgers. Such low cost items can be treated as expense for the period. Therefore, unimportant items are either left out or merged with other items. The reason for this different treatment lies in the magnitude of their amount. The dividing line between material and immaterial varies accroding to the company, the circumstances of the transaction and economic significance. It should also noted that an item considered to be material in a year may not be material in the subsequent years. Similarly, most of the companies publish their financial statements in whole ruees-round figures, by ignoring paise. Omission of paise is immaterial i.e., in significant when figures appear in lakhs. In short, all material information should be disclosed that it is necessary to make the financial statements clear and understandable.

2.3.4. Convention of Consistency :

Rules and practices of accouting should be continuously observed and applied. In order to enable the management to draw conclusions about the operation of a company over a number of years, it is essential that the practices and methods of accounting remain unchanged from one period to another. Comparisons are possible only if a consistent policy of accounting is followed. Comparison of accounting period with that in the past is possible only when the convention of consistency is adhered to. According to Anthony, “ The consistency requires that once a company had decided on one method, it will treat all subsequent events of the same character in the same fashion unless it has a sound reason to do otherwise.” This convention plays its role particularly when alternative accounting practice is equally acceptable. More ever, consistency serves to eliminate personal bias. But if a change becomes desirable, the change and its effect should be clearly stated in the financial statements. Accounts should lend themselves easily to comparisons and contrasts. This convention increases accuracy and comparability of accounting information for prediction or decision making. This convention does not prohibit changes. If there is any change, its effect should be clearly stated in the financial statements.

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2.4. Let Us Sum Up : In this lesson we have learnt meaning of accounting concept various elements of accounting concepts, meaning of accounting convention various elements of accounting convention. 2.5. Lesson End Activities : 1. What do you mean by accounting concepts ? Explain any four accounting concepts.

2. Briefly explain various accounting concepts which form the backbone of accounting.

3. What are accounting conventions ? Name and explain them in detail.

4. Write short note on

i. Business entity concept.

ii. Going concern concept

5. Write short note on



i. Convention of conservatism.

ii. Convention of Consistency

2.6. Model Answers to Check your Progress :

Question No. 1. Refer para 2.2.

Question No. 2. Refer para 2.2.1. to 2.2.10.

Question No. 3. Refer para 2.3.1. to 2.3.4. Question No. 4. Refer para (i) 2.2.1. (ii) 2.2.3. Question No. 5. Refer para (i) 2.3.2. (ii) 2.3.4. 2.7 References: Financial Accounting – R.L. Gupta – Sultan chand & Sons Advanced Accounting – S.N. Mageswari – Vikas Publishers

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28A

LESSON 3

ACCOUNTING PROCEDURE

Contents :

3.0. Aims and Objectives

3.1. Introduction

3.2. Journal

3.3. Ledger

3.4. Subsidiary Books

3.5. Trial Balance

3.6. Fundamental Journal Entries

3.7. Illustrations

3.8. Let Us Sum Up


3.10. Model Answers to Check your Progress 3.11 References

3.0. Aims and Objectives : In this lesson we are going to discuss

· meaning, rules and steps of journal

· meaning and process of ledger

· relationship between journal and ledger

· meaning, elements and advantages of subsidiary books

· meaning and rules of trial balance

· practical Illustrations of journal entries

· practical Illustrations of ledger accounts

· practical Illustrations for trial balance.

After reading this chapter you should be able to acquire basic working knowledge about the

above mentioned topics.



29

3.1. Introduction :

In the previous two chapters we have discussed basic elements, concepts and conventions of accounting . In the present chapter we are going to discuss the various procedures involved in the process of accounting starting with journal and ending with trial balance .

3.2. Journal :

3.2.1. Meaning : Journal is the day-by-day of the business, wherein both the aspects of all business transaction are recorded in chronological order i.e. date – wise. The journal is, thus , a Book of Prime Entry. It is otherwise known as the Book of Original Entry. These entries are then posted from the journal into the ledger. As such, the ledger is known as the Principal Book or the Main Book. The journal merely helps the posting of entries from the journal into the ledger. Hence, journal is known as Sunsidiary Record or Subsidiary Book. Journalising is an act of recording the debit and credit aspects of a business transaction in journal together with an explanation of the transaction, known as Narration.

3.2.2. Rules of Journals :

The act of recording the transaction in journal is called journalising. This recording is made according to certain rules and these rules, are called rules of journalising. The business must enter into transactions with a number of persons or firms, possess some property, for example , cash, furniture, machinery etc., to carry on the business, pay certain expenses for example, rent salaries, wages etc., and receice certain incomes , for example, interest, commission etc. The following accounts are required to be maintained. Rules for Debit and Credit are

i. Personal Accounts Debit the Receiver Credit the Giver

ii. Real Accounts Debit what comes in Credit what goes out iii. Nominal Accounts Debit all losses and expenses Credit all gains and incomes.

3.2.3. Compound Journal :

When many transactions of the same nature occur on a particular day, such transactions can be entered in the journal by means of combined Composite. journal entries, known as Compound Journal Entry. Make sure that the amount in the debit column equals to the amount in the credit column, based on the double entry system of book- keeping. One amount in the debit column must be equal to two or more amounts in the credit column or one amount in the credit column equals to two or more amounts in the debit column or under compound entry, a few debits it will be equal to a few credits. The rule for jounalising is the same as that of simple journal.



30 3.2.4. Steps in Journalising: The following are the steps in journalising:

i) Determine the two accounts which are involved in the transactions. ii) Clasify the above two accounts under Persaonal, Real or Nominal. iii) Find out the rules of debit and credit for the above two accounts. iv) Identify which accounts are to be debited and which account is to be credited. v) Record the date of transaction in the date column. The years and month are written once, till they change, the sequence of the dates and months should be strictly maintained. vi) Enter the name of the account to be debited in the particulars column very close to the left

hand side of the particulars column followed by the abbreviation Dr. in the same line against this, the amount to be debited is written in the debit amount, column in the same line.

vii) Write the name of the account to be credited in the second line starts with the word ‘To’a few space away from the margin in the partculars column. Against this, the amount to be credited is written in the credit amount column in the same line.

viii) Write the narration within brackets in the next line in the particulars column. ix). Draw a line across the entire particular column to seperate one journal entry from the other.

3.2.5.Advantages: The main advantages of the journal are: i. It reduces the possibility of errors ii. It provides an explanation of the transactions iii. It provides a chronological record of all transactions. 3.2.6. Limitations: The limitations of the journal are:i. It will be too long if all transactions re recorded here ii. It is difficult to ascertain the balance of each account. 3.3. Ledger

3.3.1..Meaning: As we know that first, all business transactions are recorded in the journal, separately and date-wise. The transactions relating to person, assets, expenses and income are journalized chronologically, i.e. date- wise. But one cannot find similar transactions at one place in the journal. Therefore, to have a consolidated view, we have to prepare different accounts in the ledger. No transaction gets into the ledger unless it appears first in the journal. The source of information for the ledger is the journal. Thus, journal is subsidiary to the ledger and the ledger is the principal or main book of account. The method of writing from journal to the ledger is called posting or ledger posting. It contains accounts related to business transactions. Ledger is a register, having a number of pages, which are numbered consecutively. One page in the ledger is usually allotted to one account. An index to various accounts in the ledger is given at the beginning of the ledger for easy reference.

An account is a summary of business transactions affecting a person or property or an income or an expense. An account is a brief history of financial dealings of a particular man or particular item. An account has two sides- Debit and Credit. The left side is known as Debit and the right side is known as Credit. Double entry book-keeping, means recording of both the receiving and giving aspects of every transaction. When an account receives a benefit, the account is debited. When an account gives a benefit, the account is credited. These two aspects are denoted by the symbols Debtor Dr. and Creditor Cr. respectively.

3.3.2. Relationship between Journal and ledger:

i. Transactions are entered first in the journal and then these entries are posted to appropriate accounts in the ledger. ii. The journal is subsidiary book, while the ledger is the main book of accounts.



31 iii. The journal shows the transactions in chronological order, that is, journal is a daily record. Posting from the journal is done periodically, may be weekly or fortnightly etc., iv. Entering the transactions in the journal is called journalising and the act of recording in the ledger is called posting. v. Journal is the book of prime entry, while ledger is the book of final entry.

3.3.3. Posting Process: The following procedure are followed for posting :

i) Left hand side of the Account : a. Locate in the ledger , the first Account named in the journal. b. Write the date of the transaction, in the date column, in debit- side of that account. c. Enter in the debit – side of the ledger, in particulars column, the name of the Account credited with prefix ‘ To’ d. Write in folio column on the debit-side of the account, the page number of journal from which the entry is being posted. e. Enter the amount, on the debit column of the ledger as per journal. f. Similarly, write the ledger page number inthe folio column of the journal.

ii) Right hand side of the Account :

a. Locate in the ledger, the second Accounta named inthejournal. b. Write the date of the transaction, in the date column on credit side of that Account. c. Enter in the credit-side of the ledger, in particulars column, the name of the Account debited with prefix “By”. d. Write inthe folio column of the ledger, the page number of the journal from which the entry is being posted. e. Enter the amount on the credit side of the ledger as per the journal. f. Similarly, write the ledger page number in the folio column of the journal.

3.3.4. Balancing of an Account :

Debit side of the journal entry is posted to the debit side of the account and credit side of the journal entry is posted to the credit side of the account. After the ledger posting, accounts are closed and their balances are found out. There are three possibilities while striking the balance in an account i. the two sides of the account are equal ii. the debit total is greater than the credit total iii. The credit total is greater than the debit total.

If the two sides of an account are equal, it indicates the equality of benefitds received and given by that account. The account can be closed as there is no balance in that account. If debit side total of an account is greater than the credit total, then that account indicates a “Credit Balance”. The proceedure to balance an account is:

(a) Total both the sides of the account , on rough sheet of paper. b. Find out the difference between the total i.e. credit side and debit side. The difference is called balance. c. Enter write. the differences balance. in the lesser side as Balnce c/d carried down. as the last item, and on the last date of the month.

d. Now, bith the sides are equal in total. Write the totals which are equal and close the account. The balance is afterwards taken to the opposite side and entered as balance b/d brought down. on the first day of the next month.



32 3.4. Subsidiary Books :

3.4.1. Meaning : Maintaining a single ‘ journal book’ in which journal entries are written for each transaction and posting them to ledger is practicable in small business where a single accountant can maintain accounts or the owner himself can do the accounts work. In bigger business, transactions are so numerous and varied that a single journal book is absolutely inadequate and cumbersome. Several accounts assistants may have to do accounts work as a team and share the burden. It may be necessary to group similar transactions even at journal stage in the shape of ‘ Special journals’ to minimise and facilitate ledger work. Thus, the system of Subsidiary Books as an alternative for single journal was developed. 3.4.2. Purchase Book : Purchase book is also known as ‘ bought book’ ‘Purchase day book’, invoice book’; and ‘purchase journal’. All credit purchase of goods are recorded in this book. Periodical total of this book provided total credit purchase of goods made by the firm.

3.4.3. Purchase Return Book :It is also called ‘Returns outward book’ and ‘ Purchase returns journal’. Goods returned to suppliers which were originally purchased on credit are recorded in this book. Periodically totals of this book provide data on purchase returns by the firm.

3.4.4. Sales Book : Sales book is also known as ‘Day book’, Sales day book’, ‘ Sold book’, Sales journal’, etc.All credit sales of goods are recorded in this book. Periodical totals of this book provide the total credit sales of goods by the firm. 3.4.5. Sales Returns Book : This book is also called ‘ Returns Inward Book’ and Sales Returns Journal’.Goods returned by customers which were originally sold on credit are recorded in this book. Monthly totals of this book provide data on sales returns. Credit notes sent to the customers after receiving the goods returned by them form the basis for entries in this book.

3.4.6. Debit Note: When goods are retuned to suppliers, a statement is sent to them information about the debit given to their account. This statement is called Debit Note. It is so called Debit Note., because of the Debit given to the concerned Party’s account.

3.4.7. Credit Note : Our customers may return goods to us. On receipt of the goods returned by the customers, a credit note is sent to them, by us, intimating the credit given to their account.This statement is called Credit Note.

3.4.8. Cash Book : One of the most important books maintained in any business concern is the cash book. The cash book records transactions connected with cash. The object of cash book is to keep a daily record of transactions relating to receipts and payments of cash. When the business is large, the number of transactions relating to cash are also usually large. Since, cash transaction form the major portion of the transactions of a business, it is necessary to keep a seperate book for cash transactions. If every transaction is entered in the jouranl, it will be tremendous job. Thus, it becomes necessary to have a cash book to record only the cash transactions.The following are the different types of cash book maintained in business firms : i. Simple Cash Book ii. Cash Book with Discount and Cash Columns. iii.Cash Book with Discount, Cash and Bank Columns. iv. Analytical Petty Cash Book.



33 3.4.9. Journal Proper : There are certain transactions, which cannot be entered in through any subsidiary books and such transactions are entered in the form of journal, called Journal Proper. From this journal proper, further their postings are made as usual. Examples of such transactions are: i. Opening entries ii. Transfer entries iii. Adjusting entries iv. Closing entries v. Rectification journal entries.vi. Credit Purchase or Sales of assets. vii. Bad debts.viii. Other entries not made in any other subsidiary books

3.4.10. Advantages of Subsidiary Books :

The advantages of maintaining sunsidiary books are as follows : i. Division of labour : The division of journal resulting in division of work, ensures more clerks working independently in recording original entries in the subsidiary books. ii. Efficiency : the division of labour also helps the reduction in work laod, saving in time and stationery. It alsogives advantages of sopecialisation leading to efficiency. iii.Prevents Errors and Frauds : The accounting work can be divided in such a manner that the work of one person is automatically checked by another person. With the use of internal check, the possibility of occurance of errors and frauds may be avoided. iv.Easy References : It facilitates easy references to any particular item. For instance total credit sales for a month can be easily obtained from the sale book. v. Easy Postings : Postings from the subsidiary books are made at convienient intervals depending upon the nature of the business.

3.5. Trial Balance :

3.5.1. Meaning : Books of accounts of a firm are closed at the end of the year, but they may be closed at any time according to the requirements of the proprietor. When ever books are closed, balances are found out in various accounts and then , these balances are recorded in a statement which has four columns. viz Particulars, L.F, Debit Balances and Credit Balances and this statement is called Trial Balance. Thus, Trial Balance is a statement in which the debit and credit balances of all accounts are recorded with a view two ascertain the arithmetical accuracy of the books of accounts. The only condition is the accounts must be balance in order to draw a Trial Balance. Trial Balance is not a part of journal or ledger. It is only a list or statement. No posting can ever be made to a Trial Balance. Although it’s agreement always signals the presence of an error, this does not assured a conculsive proof as to the obsolute accuracy of the books in some cases.

3.5.2. Objectives : The objects of the preparation of the Trial Balance are as follows : i. A Trial Balance provides a good check on the accuracy of the work done in

preparing ledger accounts. When the total of the debit balances agree with total of credit balances, it is quite a good proof that the ledger acounts have been correctly written up. If the Trial balance totals do not agree, then it shows that there are some errors which must be detected and rectified, before final accounts are prepared.

ii. It brings together the balances of all the accounts at one place and thus facilitates the preparing the trading accounts and profit and loos acccounts, which is the results of the business; and the balance sheet to ascertain the financial position of the firm. In short, Trial Balance is the basic to prepare the final accounts.

iii. The balance of any accounts can be easily and convinently known by the trail balance.

iv. It serves as a summary of what is contained in the ledger.



34 3.5.3. Rules for Preparation of Trial Balance :

From the available balances of various ledger accounts, the trial balance shall be prepared on the basis of following rules.

Debit All Expenses and Assets . Credit All Incomes and Liabilities.

3.6. Fundamental Journal Entries: Following are the Journal entries for the important transactions usually take place in a business. The students are advised to use these entries to familiar with passing of journal entries.

1 For Capital Introduced Cash A/c Dr

To Capital A/c

2 For Drawings Made Drawings A/c Dr

To Cash A/c

3 For Deposit into Bank Bank A/c Dr

To Cash A/c

4 For Withdrawl from the Bank Cash A/c Dr

To Bank A/c

5 For Income Received Cash A/c Dr

To Income

6 For Expenses paid Expenses A/c Dr

To Cash A/c

7 For Purchases of Asset for Cash Asset A/c Dr

To Cash A/c

8 For Purchases of Asset on Credit Asset A/c Dr

To Seller A/c

9 For Purchases of Goods for Cash

Purchases A/c Dr

To Cash A/c



35

10 Purchases of Goods on Credit Purchases A/c Dr

To Creditor A/c

11 For Sale of Asset for Cash Cash A/c Dr

To Asset A/c

12 For Sale of Asset on Credit Buyer A/c Dr To Asset A/c

13 For Sale of Goods for Cash Cash A/c Dr

To Sales

14 For Sale of Goods on Credit Debtors A/c Dr To Sales A/c

15 For Collection from Debtors Cash A/c Dr

To Debtors A/c

16 For Payment to Creditors CreditorsA/c Dr To Cash A/c

17 For Purchase Returns Creditors A/c Dr

To Purchase ReturnsA/c

18 For Sales Returns Sales Returns A/c Dr To Debtors

3.7. ILLUSTRATIONS

3.7.1. Passing of Journal Entries

Illustration: 1. Jouranlis the following transactions in the books of Miss Amudha.

Rs.

01.01.2007 Amudha commenced business with cash 50,000

02.01.2007 Purchased goods for cash 10,000

05.01.2007 Purchased goods from Mohan on credit 6,000

07.01.2007 Paid into Bank 5,000

10.01.2007 Purchased furniture 2,000

20.01.2007 Sold goods to Suresh on credit 5,000

25.01.2007 Cash sales 3,500

26.01.2007 Paid to Mohan on account 3,000

31.01.2007 Paid salaries 2,800



36 Solution : Journal Entries in the books of Amudha

Date

Particulars

Debit Rs.

Credit Rs.

Jan 1 Cash A/c Dr To Amudha’s Capital A/c Started business with capital.

50,000

50,000

Jan 2 Purchase A/c Dr To Cash A/c Cash purchases.

10,000

10,000

Jan 5 Purchase A/c Dr To Mohan A/c Credit purchase.

6,000

6,000

Jan 7 Bank A/c Dr To Cash A/c Cash paid into bank.

5,000

5,000

Jan 10 Furniture A/c Dr To Cash A/c Furniture purchased.

2,000

2,000

Jan 20 Suresh A/c Dr To Sales A/c Credit sales.

5,000

5,000

Jan 25 Cash A/c Dr To Sales A/c Cash sales.

3,500

3,500

Jan 26 Mohan A/c Dr To Cash A/c Cash paid to Mohan.

3,000

3,000

Jan 31 Salaries A/c Dr To Cash A/c Salaries paid.

2,800

2,800



37 Illustration:2. Journalise the following transactions of Miss. Banu for the year 2007.

Rs. Jan 1 Banu commenced business with cash 30,000

Jan 2 Paid into bank 21,000

Jan 3 Purchased goods by cheque 15,000

Jan 7 Drew cash from bank for office use 3,000

Jan 15 Purchased goods from Siva 15,000

Jan 20 Cash sales 30,000

Jan 25 Paid to Siva 14,000

” Discount Received 250

Jan 31 Paid rent 500

” Paid Salaries 2,000

Solution:

Date

Particulars

Debit Rs.

Credit Rs.

2007 Jan 1

Cash A/c Dr To Banu Capital A/c Banu started business with cash.

30,000

30,000

2 Bank A/c Dr To Cash A/c Cash paid into bank.

21,000

21,000

3 Purchase A/c Dr To Bank A/c Purchase through cheque.

15,000

15,000

7 Cash A/c Dr To Bank A/c Cash withdrawn from bank.

3,000

3,000

15 Purchase A/c Dr To Siva A/c Credit purchases.

15,000

15,000

20 Cash A/c Dr To Sales A/c Cash sales.

30,000

30,000



38

25 Siva A/c Dr To Cash A/c To Discount A/c Cash paid to siva and discount received.

15,000

14,750 250

31 Rent A/c Dr Salaries A/c Dr To Cash A/c Rent, Salaries etc paid.

500 2,000

2,500

3.7.2. Preparation of Ledger Accounts :

Illustration :3. Journalise the folllowing transactions of Miss. Chitra and post them in the ledger and balance the same relating to June 2007.

1 Chitra invested Rs. 5,00,00 cash in the business.

3 Paid into Bank Rs. 80,000

5 Purchased building for Rs. 3,00,000

7 Purchased goods for Rs. 70,000

10 Sold goods for Rs. 80,000

15 Withdrew cash from bank Rs. 10,000

25 Electricity Charges Rs. 3,000

31 Salaries Rs. 15,000

Solution :

Journal Entries in the Books of Miss Chitra

Date

Particulars

Debit Rs.

Credit Rs.

Jun 1

Cash A/c Dr To Chitra capital A/c Started business with cash.

5,00,000

5,00,000

3 Bank A/c Dr To Cash A/c Cash paid into bank.

80,000

80,000

5 Building A/c Dr To Cash A/c Building purchased.

3,00,000

3,00,000



39

7 Purchase A/c Dr To Cash Cash purchase.

70,000

70,000

10 Cash A/c Dr To Sales A/c Cash sales.

80,000

80,000

15 Cash A/c Dr To Bank A/c Cash withdrawn from Bank.

10,000

10,000

25 Electric Charges A/c Dr To Sales A/c Electri charge paid.

3,000

3,000

30 Salary A/c Dr To Cash A/c Salary paid.

15,000

15,000

Ledger Accounts in the books of Miss.Chitra

Capital Account

Date Particulars Rs. Date Particulars Rs. 30.6.07 To Balance c/d 5,00,000

5,00,000

1.6.07 1.7.07

By Cash A/c By Balance b/d

5,00,000

5,00,000

5,00,000

Cash Account

Date Particulars Rs. Date Particulars Rs. Jun 1 10 15

To Chitra capital A/c To Salaries A/c To Bank A/c

To Balance b/d

5,00,000 80,000 10,000

5,90,000 1,22,000

June 3 5 7 25 30

By Bank A/c By Building A/c By Purchase A/c By Electricity A/c By Salary A/c By Balance c/d

80,000

3,00,000 70,000 3,000

15,000 1,22,000

5,90,000



40

Bank Account

Date Particulars Rs. Date Particulars Rs. 03.6.07 01.7.07

To Cash To Balance b/d

80,000

80,000

70,000

15.6.07

30.6.07 By Cash A/c

By Balance c/d 10,000 70,000

80,000

Building Account

Date Particulars Rs. Date Particulars Rs. 5.6.07 1.7.07

To Cash A/c To Balance b/d

3,00,000

3,00,000

3,00,000

30.6.07

By Balance c/d 3,00,000

3,00,000

Purchases Account

Date Particulars Rs. Date Particulars Rs. 1.6.07

1.7.07

To Cash A/c

To Balance b/d

70,000

70,000

70,000

30.6.07 By Balance c/d 70,000

70,000

Sales Account

Date Particulars Rs. Date Particulars Rs. 30.6.07 To Balance c/d

80,000

80,000

10.6.07

1.7.07

By Cash A/c By Balance b/d

80,000

80,000

80,000



41 Electricity charges Account


1.7.07

To Cash A/c

To Balance b/d

3,000

3,000

3,000

30.6.07 By Balance c/d 3,000

3,000

Salary Account


1.7.07

To Cash A/c

To Balance b/d

15,000

15,000

15,000

30.6.07 By Balance c/d 15,000

15,000

3.7.3. PreparationTrial Balance:

Illustration :4. The following balances are extracted from the books of Miss.Dhivya. Prepare trial balance as on 30.12.2007.

Particulars Rs. Capital

Cash in hand

Building

Stock

Sundry creditors

Commission paid

Rent & Taxes

Purchases

Salaries

Discount allowed

Drawings

Bad debts

4,70,000

6,000

3,20,000

33,000

26,000

750

6,300

1,65,000

70,600

650

5,000

1,350

Machinery

Sundry Debtors

Repairs

Insurance premium

Sales

1,58,800

48,000

5,400

3,300

2,90,000



Telephone charge

Furniture

Discount earned

Loan from Mohammed

Reserve fund

Bills receivable

Bills payable

42

6,450

11,000

1,100

51,000

5,900

8,600

6,000

Solution : Trial Balance of Miss. Divya as on 31.12.2007

Particulars Dr. Cr. Capital Cash in hand Building Stock Sundry creditors Commission paid Rent & Taxes Machinery Sundry Debtors Rapairs Insurance premium Sales Telephone charges Furniture Discount allowed Purchases Salaries Drawings Bad debts Loan from Mohammed Discount earned Reserve fund Bills receivable Bills payable [ [

Total

6,000 3,20,000 33,000

750 6,300 1,58,800 48,000 5,400 3,300

6,450 11,000 650 1,65,000 70,000 5,000

1,350

8,600

8,50,200

4, 70,200

26,000

2,90,000

51,000 1,100 5,900

6,000 8,50,200



43 Illustration :5. Miss. Eswari provides the following particulars as on 31.12.2007, prepare Trial Balance as on the above date.

Rs.

Commenced business capital 5,00,000

Purchases Furniture for 20,000

Purchases goods 1,00,000

Purchases goods on credit form Guna 2,00,000

Cash sales 1,50,000

Credit sales 2,00,000

Salarise paid 10,000

Interest Received 5,000

Solution : Journals Entries in the Books of Miss. Eswari for the year ended 31.12.2007

Particulars Dr. Cr. Cash A/c Dr 5,00,000 To Capital A/c 5,00,000 Being Capital Introduced.

Furniture A/c Dr 20,000 To Cash A/c 20,000 Being Furniture Purchasesed.

Purchases A/c Dr 1,00,000 To Cash A/c 1,00,000 Being goods Purchases for cash.

Purchases A/c Dr 2,00,000 To Guna A/c 2,00,000 Being goods Purchases an credit.

Cash A/c Dr 1,50,000 To Sales A/c 1,50,000 Being cash sales.

Debtors A/c Dr 2,00,000 To Sales A/c 2,00,000 Being credit sales.

Salaries A/c Dr 10,000 To Cash A/c 10,000 Being Salaries paid. Cash A/c Dr 5,000 To Interest A/c 5,000 Being interest received.



44

Ledger Accounts in the books of Miss. Eswari for the year ended 31.12.2007.

Cash A/c

Particualrs Rs Particulars Rs To Capital 5,00,000 By Furniture 20,000 To Cash 1,50,000 By Purchases 1,00,000 To Interest 5,000 By Salaries 10,000

By Balance c/d

5,25,000

6,55,000 6,55,000 To Balance b/d 5,25,000

Capital A/c

Particualrs Rs Particulars Rs To Balance c/d 5,00,000 By Cash 5,00,000 5,00,000 5,00,000 By Balance b/d 5,00,000

Furniture A/c

Particualrs Rs Particulars Rs To Cash 20,000 By Balance c/d 20,000 20,000 20,000 To Balance b/d 20,000

Purchases A/c

Particualrs Rs Particulars Rs To Cash 1,00,000 By Balance c/d 3,00,000 To Credit 2,00,000 3,00,000 3,00,000 To Balance b/d 3,00,000

Sales A/c

Particualrs Rs Particulars Rs To Balance c/d 3,50,000 By Cash 1,50,000 By Credit 2,00,000 3,50,000 3,50,000 By Balance b/d 3,50,000

Creditors A/c

Particualrs Rs Particulars Rs To Balance c/d 2,00,000 By Purchases 2,00,000



2,00,000

45

2,00,000 By Balance b/d 2,00,000

Debtors A/c

Particualrs Rs Particulars Rs To Salas 2,00,000 By Balance c/d 2,00,000 2,00,000 2,00,000 To Balance b/d 2,00,000

Salary A/c

Particualrs Rs Particulars Rs To Cash 10,000 By Balance c/d 10,000 10,000 10,000 To Balance b/d 10,000

Interest A/c

Particualrs Rs Particulars Rs To Balance c/d 5,000 By Cash 5,000 5,000 5,000 By Balance b/d 5,000

Trial Balance of Miss. Eswari as on 31.12.2007

Particulars Debit Credit Capital 5,00,000 Furniure 20,000 Purchases 3,00,000 Sales 3,50,000 Debtors 2,00,000 Creditors 2,00,000 Salaries 10,000 Interest 5,000 Cash 5,25,000 Total 10,55,000 10,55,000



46

3.8. EXCERCISES

3.8.1. Passing of Journal Entries : Exercise: 1. Journalise the following transactions of Mr.Arun for the Month of January 2007. Rs.

Jan 3 Received cash from Ramkumar 60,000

4 Purchased goods for cash 15,000

11 Sold goods to Damodaran 22,000

13 Paid to Ramkumar 40,000

17 Received from Damodaran 20,000

20 Bought furniture from Jagadeesan 5,000

27 Paid rent 1,200

30 Paid salary 2,500

Excercise :2 Journalise the following transactions of Mr.Balaji for the Month of January 2007 Rs.

Jan 1 Received cash form Siva 75,000

7 Paid cash to Sayeed 45,000

10 Bought goods for cash 27,000

12 Bought goods on credit form David 48,000

15 Sold goods for cash 70,000

Excercise:3. Journalise the following transactions of Mr.Cheran for the Month of January

2007

Rs Jan 3 Bought goods for Cash 84,500

7 Sold goods to Dhanalakshmi on credit 55,000

9 Received Commission 3,000

10 Cash Sales 1,09,000

12 Bought goods from Mahalashmi 60,000

15 Recieved five chairs from Revathi & Co at Rs. 400 each

20 Paid Revathi & Co, cash for five chairs

28 Paid Salaries 10,000

Paid Rent 5,000



47 Excercise:4. Journalise the following transactions of Mr.Dhayalan for the Month of January 2007. Rs.

Jan 1 Sold goods on credit to Mohanasundaram 75,000

12 Purchased goods on credit from Bashyam 70,000

15 Sold goods for cash form David 50,000

20 Received from Mohanasundaram 70,000

25 Paid to Bashyam 50,000

Excercise: 5 Journalise the following transactions of Mr.Arun for the Month of January 2007 [ Rs.

Jan.1 Started business with cash 1,25,000

3 Purchased goods 20,000

5 Cash sales 37,000

6 Cash sales 18,000

7 Purchasesd from Mr. Velusamy 50,000

8 Crdit sales to Mr. Palani 60,000

12 Bought furniture 7,000

18 Sales to Mr. Selvendran 18,000

24 Purchased goods 1,30.000

28 Cash sales 55,000

30 Cash received from Palani 60,000

30 Paid to Mr. Velusamy 50,000

Excercise:6 Journalise the following transactions of Mr.Favourable for the Month of Jan 2007.

Rs.

Jan 1 Started business with cash 2,50,000

6 Bought furniture 15,000

7 Cash purchase 90,000

9 Cash sales 40,000



48 10 Cash purchase 25,000 14 Credit sales to Moorthy 15,000

15 Credit purchase from Mr. Venkat 15,000

16 Cash sales 44,000

17 Received from Moorthy 14,500

17 Allowed discount 500

21 Paid to Venkat 14,700

21 Discount allowed by him 300

26 Advertisement 4,000

27 Electricity 2,700

30 Sales 72,000

31 Rent 4,000

31 Salaries 15,000

31 Telephone Charges 6,700

Excercise :7 Journalise the following transactions of Mr.Gokul for the Month of Jan 2007. Rs.

Jan 1 Introduced cash as capital 45,000

3 Paid into Bank 25,000

4 Sales 18,000

5 Purchases 15,000

18 Cash collected from Chezhian 23,700

21 Withdrawn for office use 5,000

25 Telephone charges 1,400

26 Cash sales 7,000

27 Credit purchases from Muthu 7,500

28 Credit sales to Kumar 12,000

29 Paid to Muthu 7,500

30 Cash received from Kumar 11,500

Allowed discount 500

Excercise:8. Journalise the following transactions of Mr.Happy for the Month of Jan 2007. [

Rs.

Jan1. Purchased goods for cash 10,000

2. Purchased stationery for cash 500

3. Purchased furniture for cash 3,000



49

4. Sold goods for cash 8,000

5. Sold goods to Jagan for cash 3,000

6. Sold goods to James 2,000

7. Paid Rent to Krishnan, the landlord 800

8. Paid salary 8,000

9. Paid salary to the manager Mr. Lokesh 3,000

10. Paid freight on goods purchased 300

11. Paid freight on machine purchased 400

12. Paid wages 500

13. Paid Wages to erect a machine 1,000

Excercise:9. Journalise the following transactions of Mr.Indian for the Month of Jan 2007

Jan 1 Business started with Rs. 2,50,00 and cash Rs.

Deposited with Bank 1,50,000

3 Purchased machinery on credit from Rangan 50,000

6 Bought furniture from Ramesh for cash 25,000

12 Goods sold to Yesodha 22,500

13 Goods Returned by Yesodha 2,500

15 Goods sold for cash 50,000


20 Cash received from Yesodha 10,000

21 Cash paid to Raman 20,000

25 Cash withdrawn from bank 50,000

29 Paid advertisement expenses 12,500

30 Bought office stationery for cash 5,000

31 Cash withdrawn from bank for personal use of the proprietor 6,250

31 Paid salaries 15,000

31 Paid rent 2,500

Excercise:10. Journalise the following transactions of Mr.Jaggu for the Month of Jan 2007. Rs

Jan 1 Arul commenced business with 21,000

2 Bought goods for Cash 9,200



50

4 Sold goods to Kannan on Credit 5,600

5 Purchased goods form Mani 3,300

9 Received Cash from Kannan 3,600

11 Paid Mani on account 2,100

16 Sold goods to Manohar 3,500

21 Cash Sales 7,500

26 Paid Mani 1,200

29 Received Cash from Manohar 3,500

30 Paid Rent 450

30 Paid Salaries to Office Staff 700

3.8.2. Preparation of Ledger Accounts

Excercise :11 Journalise the following transactions of Mr.Karuna and post them to proper ledger accounts relating to the month of January 2007. Rs.

Jan. 1 He started business with a capital of 10,000

4 Bought goods from Velan 6,750

7 Cash Purchases 3,000

10 Cash Sales 4,000

13 Bought goods from Velan 2,000

16 Sold goods to Gurunath 5,000

18 Paid Cash to. Velan 2,850

19 Sold goods to Gurunath 500

24 Paid Velan on account 2,400

26 Reecived cash from Gurunath 1,650

27 Paid Salaries 1,250

Excercise:12 . Journalise the following transactions of Mr.Lallu and post them to proper ledger accounts relating to the month of January 2007. Rs

Jan 1 Started business with 4,50,000

3 Goods purchased 70,000

5 Doods sold 15,000

10 Goods purchased from Rangasamy 2,00,000

16 Goods returned to Rangasamy 5,000

23 Drew from bank 30,000



51

26 Furniture purchased 10,000

26 Settled Rangasamy’s account

31 Salaries paid. 12,000

Excercise:13 Journalise the following transactions of Mr.Murugan and post them to proper ledger accounts relating to the month of January 2007. Rs.

Jan 1 He started business with 3,00,000

3 Opened a current account with Indian Overseas Bank 50,000

12 Bought goods from Tmt. Sumathi 90,000

18 Paid to Tmt. Sumathi 90,000

20 Sold goods to Tmt. Chitra 1,26,000

26 Tmt. Chitra settled her account [

Excercise:14. Journalise the following transactions of Mr. Naresh and post them to proper ledger accounts relating to the month of January 2007. Rs. [ Jan 5 Sold goods to Arumugam on Credit 17,500

9 Bought goods for cash from Chellappan 22,500

12 Met Travelling expenses 2,500

15 Sivakumar Received from as loan 80,000

21 Paid wages to workers 3,000

Excercise:15. Journalise the following transactions of Mr.Original and post them to proper ledger accounts relating to the month of January 2007.

Jan 1 He commenced business with the following assets and liabilities. Rs Plant and Machinery 2,50,000

Stock 90,000

Furniture 7,000

Cash 50,000

Sundry creditors 1,50,000

2 Sold goods to Sundar 1,50,000

3 Bought goods from Natarajan 56,000

4 Sundar Paid cash 1,25,000

5 Returned damaged goods to Natarajan 2,000

9 Paid to Natarajan 28,000

31 Paid Rent 5,000

Paid Salaries 9,000



52 Excercise:16. Journalise the following transactions of Mr.Purushothaman and post them to proper ledger accounts relating to the month of January 2007. Rs Jan 1 Received cash from Ramesh 1,60,000


7 Sold to Suresh 30,000

15 Bought from Dayalan 40,000

18 Sold to Ganesan 50,000

20 Withdrew cash for personal use 18,000

25 Received commission 20,000

30 Paid Rent 5,000

30 Paid Salary 10,000

3.8.3. Preparation of Trial Balance:

Excercise:17. Prepare Trial Balance as on 31.3.2004 from the books of Miss Quick.

Rs. Capital

General expenses

Machinery

Wages

Bad debts

Sales

Commission

Bills payable

Bank overdraft

Discount

2,49,000

97,000

1,18,000

14,000

1,100

3,30,000

5,500

7,700

28,600

1,210

Drawings

Building

Stock

Insurance

Creditors

Loan Cr..

Purchases

Reserve Fund

Cash in hand

24,000

78,000

1,32,400

2,610

5,000

75,000

2,10,800

15,000

25, 320



53 Excercise :18.Prepare trial balance as on 31.12.2002 from the following balances of Mr. Raghul.

Rs.

Drawings

Stock 1.1.2007.

Capital

Furniture

Sundry creditors

Printing charges

Bank loan

Freight

Income tax

Machinery

74,800

30,000

2,50,000

33,000

75,000

1,500

1,20,000

3,500

9,500

2,15,400

Purchases

Discount received

Discount allowed

Sales

Rent

Sundry expenses

Bills receivable

Carriage outwards

Insurance

Bills payable

2,95,700

1,000

950

3,35,350

72,500

21,000

52,500

1,500

1,200

31,700

Excercise:19.Prepare trial balance as on 31.3.2007 from thefollowing balance of Mr. Sathish..

Rs.

Drawings

Capital

Sundry creditors

Bills Payable

Sundry Debtors

Bills Receivable

Loan from Shyam

43,000

2,12,000

61,500

22,000

55,000

72,600

2,50,000



Furniture & Fittings

Opening stock

Cash at bank

54

12,250

2,23,500

86,250

Purchases

Sales

Salaries

Sales return

Purchases return

Travelling expenses

Commission Paid

Discount earned

Cash in hand

2,98,000

3,64,000

44,950

500

2,550

12,300

250

2,000

65,450

Excercise: 20. Prepare trial balance as on 31.3.2007 from the following balance of Mr.Tamil Mani.

Rs.

Capital

Building

Machinery

Furniture

Car

Opening stock

Purchases

Sales

Sundry debtors

Reserve for

4,20,000

1,15,000

60,000

11,000

68,000

86,000

94,000

1,96,000

16,200

7,300

Cash in hand

Cash at bank

Salaries

Rent

Commission

Rates and Taxes

Bad debts

25,000

84,700

94,000

48,000

1,400

2,600

3,200



Insurance Geneal Expense

Sundry Creditors

55

2,400 800

68,000

3.9. Let Us Sum Up : In this lesson we have discussed a theoretical procedure of accounting equation and practical applications of journal, ledger and trial balance. 3.10. Lesson End Activities : 1. What is meant by journal ? Mention the rules for journalizing . 2. What is meant by ledger ? Explain the rules regarding posting and balancing of ledger accounts . 3. What is meant by subsidiary books ? What are its various contents ?


Ex : 17. Debit : 97,000 +78,000 + 24,000 + 1,32,400 + 2,610 + 1,100 + 5,500

+ 25,320 + 1,18,680 + 14,400 + 1,210 + 2,10,800 = 7,11,020 Credit : 2,49,000 + 3,30,720 + 7,700 + 28,60 + 5,000 + 75,000+ 15,000 = 7,11,020 Ex : 18. Debit : 30,000 + 74,800 + 33,000 + 2,95,700 + 950 + 1500 + 3,500 + ` 9500 + 2,15,400 + 72,500 + 21,000 + 52,500 + 1,500 + 1,200 = 8,13,050 Credit : 2,50,000 + 1,000 + 3,35,350 + 75,000 + 1,20,000 + 31,700 = 8,13,050

Ex : 19. Debit : 43,000 + 72,600 +55,000 + 2,98,000 + 86,250 + 250 + 44,950

+ 500 + 12,300 + 12,250 + 2,23,500 + 65,450 = 9,14,050 Credit : 2,12,000 + 61,500 + 22,000 + 3,64,000+2,550 + 2,50,000+ 2,000 = 9,14,050 Ex : 20 Debit : 1,15,000 + 60,000 + 11,000 + 68,000 + 86,000 + 94,000

+ 16,200 + 25,000 + 84,700 + 94,000 + 48,000 + 1,400 + 2,600 + 3,200 + 2,400 + 800 = 7,12,300

Credit : 4,20,000 + 1,96,000 + 7,300 + 68,000 + 21,000 = 7,12,300 3.12 References : Financial Accounting – R.L. Gupta – Sultan chand & Sons Advanced Accounting – S.N. Mageswari – Vikas Publishers

**********



55 A

LESSON 4

RECTIFICATION OF ERRORS Contents : 4.0. Aims and Objectives 4.1. Introduction 4.2. Meaning of Errors 4.3. Meaning of Rectification of Errors 4.4. Classifications of Errors 4.5. Stages in Rectification of Errors 4.6. Let Us Sum Up 4.7. Lesson End Activities 4.8. Model Answers to check your Progress 4.9. References 4.0. Aims and Objectives : In this lesson we are going to discuss

· meaning of errors · various types of errors · various stages involved in the rectification of errors.





56

4.1. Introduction : As we discussed in the previous chapters, accounting proceedure include various books

and accounts at different stages. The main purpose such proceedure is maintain the accuracy of the data in each stage of accounting. But, practically due to so many obivious reasons the accuracy in the statements is often distrubed which are called as errors.The present chapter deals with various types opf errors and proceedure for rectification of such errors . 4.2. Meaning of Errors :

An error is a mistake and rectification means correcting the mistakes that have occured . A firm is primarily interested in finding out its true profit and financial position, at every period of closing the financial year. The staff incharge of account section put best effort to be careful and most accurate in regarding the transactions. But due to human element present in the work accuring of mistakes. or errors are unavoidable.

(4.3) Meaning of Rectification of Errors :

It is important to note that erasing or striking of figures should be avoided in the books of accounts. Because erasing or striking of figures tend to discredit the regards and gives chances for fraud. It also reduces the legal value of the books of accounts, apart from giving a dirty look. Therefore it is necessary to follow some commonly accepted proceedure for rectifying errors. If a posting of an item is omitted, then the amount should be posted immediately. But, if a wrong posting is made, it can be corrected by passing and adjusting entry. 4.4. Classification of Errors :

Errors On the Basis of Nature On the Basis of Effect On the Basis of Effect

on Trial Balance on Number of Accounts Error of omission Disclosed by Trial Balance One-sided error Error of commission Not disclosed by trial balance Two-sided error Error of principle Compansating error. 4.4.1. Errors of Omission : If a transaction is completely omitted, there will be no effect on the Trail Balance.When a transaction goes completely unrecorded in both aspects or a transaction after being recorded in the books of primary entry is not at all posted in the ledger, the error is an error of omission. For instance, if a credit purchase is omitted to be recorded in the purchase day book, then it will be omitted to be posted both in the Purchase Account and and suppliers account.

57



4.4.2. Errors of Commission : In this context commission means doing something which should not have been done. It is occured due to lack of concentration or carelessness while preparing accounts. This type of error may be arise in the following cases.

i. Entering wrong amount in a subsidiary book.

ii. Entering correct amount in a wrong subsidiary book.

iii. Right amount in the wrong side of correct account.

iv. Wrong amount in the right side of correct account.

v. Wrong amount in the wrong side of correct account.

vi. Wrong amount in the wrong side of wrong account.

vii. Error of balancing of accounts.

4.4.3. Error of principle : An error of principle is an error which violates the fundamental concepts and conventions of accounting. This type of error may be arise in the following cases.

i. Treating capital expenditure as revenue expenditure.

ii. Treating Revenue expenditure as Capital expenditure.

iii. Improper valuation of investments .

iv. Improper valuation of stock.

v. Inadequate or excess provisions for depreciation.

vi. Inadequate or excess provision for doubtful debts.

4.4.4. Compensating Errors : Those are errors that cancel each other, and because of this they are rather not simple to discover, they may be disimilar in nature, but are of a similar amount. For examples: i. Under posting of the purchases books may be compensated are cancelled out with the undercasting of the sales book by a similar amount. ii. Omission of posting of a certain amount on the debit side of an account may be compensated by excess posting of the similar amount on the debit side in some other account or accounts. Compansating errors do not affect to the agreement of the Trail Balance. Such errors will remain even inspite of the fact that the Trail Balance agrees. 4.4.5. Errors Disclosed by Trail Balance : The following are the error due to which the trail balnce does not agree. These are the errors which are disclosed by the trial balance. Trial Balance, In general, Discloses any error which effects one side of the account. For examples : an error in casting the books of subsidiary records , error in carrying forward the one page to another page., error in posting from the books of subsidiary record of ledger. Error in balancing the accounts, error in preparation of debtors schedule and creditor schedule, for getting to carry forward a balance of an account to the trial balance, omission of casting, error in total in the trial balance, for getting to right cash book balnce in the trial balance.

4.4.6. Errors Not Disclosed by Trial Balance : Following are some of the errors which will not affect the agreement of the trial balnce. These are the erors which are not disclosed by the trial balance.

58



a. Omission in recording the transaction in the books of original entry : If a transaction is not recorded, then both debit and credit effects of that transactions will be ommitted and the trail balnce will not be affected.

b. Wrong recording in the original books : Again, trial balanace will not be affected because the same amount though wrong. will be shown on both sides of the trial balance .

c. Posting to wrong account with correct account and on correct side : If debit of Rs. 1,000/- to Ram is wrongly posted to the debit side is corrrect. of Rammohan’s account Rs. 1,000/- amount is correct. , trial balance will remain unaffected.

d. Compansatory errors : Such errors also do not affect the agreement of a trial balnce. For getting to post Rs.1,000/- on the debit side of a certain account may be compensated by under posting of Rs. 1,000/- on the credit side of some other account or by over posting of Rs.1,000/- on the debit side in some other account.

4.4.7. One Sided Error : Errors which affect one account can be error of a. Casting , b. Carry forward c. Posting d. Balancing e. forgetting to shown in the trial balance. Such errors should first be located and then rectified by giving an explanatory note or by giving a journal entry with the help of a suspense account. 4.4.8. Two Sided Error : Errors which affect two or more accounts are as follows : a. Error of omisssion b. error of recording c. error of posting to wrong account d. error of principle. As these errors affect two or more accounts, rectificationof such errors can be done with the help of journal entry. Some times, where journal entry is not possible , the rectificationis carried out by given explanatory notes. 4.4.9. Suspense Account : When it is difficult to locate the mistakes before preparing the final accounts, the difference in the Trial Balance is transferred to a newly opened imaginary and temporary account called Suspense Account. The Suspense Account is prepared to avoid the delay in the preparation of final accounts. 4.5 Stages in Rectification of Errors :

The time of deduction of errors decide the mode of rectification. To be more detailed, the errors can be rectified in three stages as follows : 4.5.1. Pre- Trial Balance Stage : This is a stage where the final trial balance is not prepared . Rough trial balance is drawn and totals are done. If the totals of the trial balance disagree, then we have to take steps which have been explained in the previous pages. If still the trial balance is not agreed, the errors are to be found out . The errors are rectified in the rough trial balance and final trial balance is made for the preparation of final accounts.

4.5.2. Pre-Final Accounts Stage: When the trial balance disagrees , efforts are made to locate the errors and to rectify them. When the error cannot be located, and the preparation of the final accounts is urgent. The difference in the trial balance is made good by writing it temporarily in the smaller side of the trial balance, under the name of suspense account. The suspense account is only a temporary device which should not be allowed to remain in the books for long. In the next accounting period , attempts must be made to discover the errors which caused the difference in the trial balance. Again if the credit side of the trial balance is shorter, the suspense account is credited and if the debit side of the trial balance is shorter, if the suspense account is debited. Thus, the trial balance is artificially tallied and the final accounts are prepared. The suspense account is shown in the balance sheet. If the suspense

59



account shows a debit balance, it appears on the assets side and if it shows a credit a balance, it appears on the liability side. For every kind of error: one –sided or two sided errors there will be journal entries. 4.5.3. Post Final Accounts Side: This is a stage where the preparation of trial balance and Final Accounts is completed. That, if the errors in the accounts are not readily traceable, then the difference in the trial balance is placed in the Suspense Account and the Final Accounts- Trading and Profit and Loss Account and Balance Sheet, are prepared. Since the suspense account is entered in the trial balance it has to be incorporated in the final accounts. If the Suspense is placed in the balance sheet, suspense account should be reopened in the next financial year and as and when errors committed in the previous year are located, rectification entry should be made. Thus finally, suspense account shoals be completely be closed when all such errors committed in previous year are located and rectified. An error in a nominal account and some real accounts affects the trading result. After the preparation of final accounts , nominal account must not be rectified through the concerned nominal accounts. Moreover, the profits disclosed in the previous year differ from the true profits. Therefore, such errors are rectified through profit and loss adjustment account. It should be remembered that only those rectifying entries are made through profit and loss adjustment accounts which are normally related with the items of trading and profit and loss account. Similarly, after the rectification of errors, the balance of the new profit and loss adjustment account are transferred to capital account.

4.5.4. Subsequent Accounting Years Stage : If errors are located during subsequent accounting years, the following aspects should be noted for the rectification. i. As per the requirement, Personal Accounts and Real Accounts can be debited and credited in the rectification entries. Similarly, suspense accounts can also be debited or credited as the case may be. ii. It is not possible to debit or credit accounts, which are usually closed by transferring to trading account or profit and loss account because those accounts where already closed for the year in which the error was committed. If the nominal accounts or the goods accounts are debited or credited as a part of rectification, the subsequent years accounts in which rectification is made, will be unnecessarily affected. iii. Profit and Loss adjustment account or Capital accounts of the owners can be directly debited or credited for the purpose of rectification, after assessing the impact of rectification on the profit. 4.6. Let Us Sum Up : In this lesson we have discussed meaning and significance of errors, the various types of errors and the procedure for rectification of such errors. 4.7. Lesson End Activities : 1. What is meant by error ? Explain various types of errors. 2. What is meant by rectification error ? What are the stages involved in the rectification? 3. Write short note in a. Error of Principle b. Error of Compensation c. Errors disclosed by Trial Balance d. Errors not disclosed by Trail Balance e. Suspense Account.


Question No.1. Refer para4.2.,Question No.2.Refer para4.3.,Question No.3.Refer para4.4.

4.9 References: Financial Accounting – R.L. Gupta – Sultan chand & Sons Advanced Accounting – S.N. Mageswari – Vikas Publishers



59 A

LESSON 5

FINAL ACCOUNTS OF SOLE TRADERS Contents : 5.0. Aims and Objectives 5.1. Introduction 5.2. Trading Account 5.3. Manufacturing Account 5.4. Profit and Loss Account 5.5. Balance Sheet 5.6. Adjustments 5.7. Illustrations 5.8. Lesson End Activities 5.9. Let Us Sum Up 5.10. Model Answers to Check your Progress 5.11 References 5.0. Aims and Objectives : In this lesson we are going to discuss

· meaning and procedure of preparation of trading account

· meaning and procedure of preparation of manufacturing account

· meaning and procedure of preparation of profit and loss account

· meaning and procedure of preparation of balance sheet.





60

5.1. Introduction : A Trial Balance marks a definite stage in the preparation of accounts. It indicates that all the transaction for a particular period has been duly entered, posted and balanced. But this it self is not the end of book-keeping work. Its a means to an end, the end being a. to find out the profit or loss made by the business firm in given period and b. to understand the financial position of the business as on a given date. A business man can ascertain these by preparing the final accounts, which is prepared on the basis of the trial balance. The Preparation of final accounts is the last step in the accounting circle. The final account includes manufacturing account, trading accounts, profit and loss account and balance sheet. Even though the balance sheet is a statement, for all practical purposes, it is treated as part of final accounts. We are concerned with trading and profit and loss account and balance sheet and the same are discussed in this chapter. 5.2. Trading Account : Trading account is prepared mainly to know the profitability of goods bought or manufacture and sold by the business man. The difference between the selling price and cost price of the goods is the gross result. The term ‘Goods’ means the goods bought for resale. It does not include assets. If sale proceeds are more than the cost of goods sold, gross profit is made. If sale proceeds are less than the cost of the goods sold, gross loss is incurred. Format:

Trading Account for the year ended on 31st December Dr. Cr. Rs. Rs. To Opening Stock - By Sales less Return - To Purchases less Returns - By Closing Stock - To Wages - - To Charges - - To Freight - - To Dock Charges - - To Excise Duty - - To Octopi - - To Import duty - - To Fuel, Power etc. - - To Store Consumed - - To Royalty Production Basis. - - To Manufacturing expenses - - To Gross Profit - - - - 5.3. Manufacturing Account : A business man purchases finished goods for resale where as a manufacturer buys raw materials, converts them in to finished goods, by incurring certain expenses, and then sells them. Thus, Trading Account is spitted into two-Manufacturing Account and Trading Account. Manufacturing account is the account to show the cost of manufacture or production. On the debit side, opening stock of raw materials, work- in-process, purchase of raw materials, carriage, manufacturing expenses and all other expenses relating to factory are

61 entered. On the credit side, closing stock of raw materials, work- in-process, are shown and the balance, representing the cost of production of finished goods, is transferred to Trading



Account. If one wants to know the cost of manufacturing, then as Manufacturing Account- will have to be prepared. 5.4. Profit and Loss Account : By preparing the Trading Account, its possible to find out the Gross Profit or Gross Loss made during the given period. The next step is the preparation of the Profit and Loss Account to ascertain net profit earned or net lost suffered during a given period of time. The balance of Trading Account is brought down to Profit and Loss Account. Then, the Profit and Loss Account is credited with other incomes and debited with all indirect expenses. Then the Profit and Loss Account may be balance and the balance is Net Profit or Not Loss. to be transferred to capital account, in case of sole trader or partnership firms.

Profit and Loss Account for the year ended 31 st December Dr. Cr. Rs. Rs. To Gross Loss - By Gross Profit - To Management expenses - By Interest Received - Office Salaries - By Discount Received - Rent of Office Building - By Commission - Office Lighting - By Income from Investment - Office, Rent and Taxes By Apprenticeship Premium - Printing and Stationery - By Rent from tenants - Telephone Charges - By Reserve for Dis on Creditors - Postage - By Interest on Renewal of Bills - Legal Expenses - By Miscellaneous income - Audit Fees - By Net Loss - Insurance - General expenses etc. - To Selling expenses : - Salesman Salaries - Traveling expenses - Advertising - Bad Debts - Selling Commission - Brokerage - Free Samples - To Distribution expenses : - Carriage out - Warehouse Rent - Warehouse Insurance - Delivery Van expenses - Packing expenses - To Depreciation : - Depreciation of Assets - Maintenance expenses - To Finance expenses : - Discount Allowed - Interest on Loan - Interest on Capital - Discount on Bills - Loss by Fire

-

62

To Net Profit -



5.5. Balance Sheet: A Balance Sheet is a statement of the financial position at a given date. The given date is the date at which the final accounts are prepaid. Transactions are first recorded in journal. Entries in the journal are posted to ledgers. Ledger accounts are balanced and the balances are recorded in a Trial Balance. Trial Balance consists of all Accounts – Personal, Real and Nominal. From the Trial Balance, nominal accounts are transferred to Trading or Profit and Loss Account and the remaining balances are taken to Balance Sheet. However, Balance Sheet is a summary of whole of the accounting record. This is because the nominal accounts are transferred to Revenue Accounts, and Revenue account is closed by shifting the balance to the Balance Sheet. Balance Sheet is also known as a Statement of Assets and Liabilities. Balance sheet is the last and the most important link in the chain of Final Accounts and Statements. It describes the financial position of a business in a systematic standard form. It is a mirror of a business. When the assets exceed the liabilities, one can conclude that the business is sound and solvent. The function of the Balance Sheet is to show the picture of the business on a particular date.

Balance Sheet as on Liabilities Rs. Assets Rs.

Current liabilities Liquid assets Bills Payable Cash in Hand Sundry Creditors Cash at Bank Bank Overdraft Cash in Transit Long Term Liabilities Floating Assets Loan from Bank Sundry Debtors Deposits Investments Bills Receivable Fixed Liabilities Stock in Trade Capital Prepaid expenses Fixed Assets Plant and Machinery Buildings Furniture & Fixtures Land Fictitious Assets Advertisement Miscellaneous expenses Profit & Loss Intangible Assets Goodwill Patents Patterns Copyright 5.6. Adjustments : Following are the Adjustments that are to be considered while preparing final accounts. Each and every adjustment is to be posted in two places. The following is the summary of those two places for each adjustment. 1. Closing Stock. i. Trading Account Credit Side, show as an item. ii. Balance Sheet Assets Side, show as an item.

63 2. Depreciation i. Balance Sheet Assets Side, deduct from particular asset.



ii. Profit and Loss Account debit side, show as an item. 3. Outstanding Expenses i. Profit and Loss Account Debit side, add with particular expense. ii. Balance Sheet Liabilities side show as an item. 4. Prepaid Expenses i. Profit and Loss Account Debit side, deduct from particular expense. ii. Balance Sheet Assets side, show as an item. 5. Accrued Income or Outstanding Income i. Profit and Loss Account Credit side, add with particular income. ii. Balance Sheet Assets side, show as an item. 6. Income Received in Advance i. Profit and Loss Account Credit side, deduct from particular income. ii. Balance Sheet Liabilities side, show as an item. 7. Interest on Capital i. Balance Sheet Liabilities side, add with capital. ii. Profit and Loss Account Debit side, show as an item. 8. Interest on Drawings i. Balance Sheet Liabilities Side, deduct from capital. ii. Profit and Loss Account Credit side, show as an item. 9. Bad Debts i. Balance Sheet Assets side, deduct from sundry debtors. ii. Profit and Loss Account Debit side, show as an item. 10. Provision for Bad debts i. Balance Sheet Assets side, deduct from sundry debtors. ii. Profit and Loss Account Debit side, show as an item. 11. Provision for Discount on debtors i. Balance Sheet Assets side, deduct from sundry debtors. ii. Profit and Loss Account Debit side, show as an item. 12. Provision for discount on creditors i. Balance Sheet Liabilities side, deduct from sundry creditors. ii. Profit and Loss Account Credit side, show as an item. 13. Drawings of Goods by proprietor i. Balance Sheet Liabilities side, deduct from capital. ii. Trading Account Credit side, show as an item. 14. Free Samples to customers i. Trading Account Credit side, show as an item. ii. Profit and Loss Account Debit side, show as an item. 15. Loss of Stock i. Trading Account Credit side, show as an item. ii. Profit and Loss Account Debit side, show as an item. 16. Manager Commission i. Profit and Loss Account Debit side, show as an item. ii. Balance Sheet Liabilities side show as an item. Note : While calculating manager commission on Net Profit or Gross Profit due consideration is to be given whether it is based on Profit before charging such commission or after charging such commission

64

5.7. ILLUSTRATIONS



5.7.1. Treatment of Certain Items i. Bad Debts given in the Trial Balance only Illustration :1. From the following particulars, calculate Amount of Debtors balance to be shown in the balance sheet and amount of Net Profit assuming that all other items are not relevant. Sundry debtors as per trial balance Rs. 1, 00,000 Gross profit as per trial balance Rs. 50,000 Bad debts as per trial balance Rs. 1,000 Solution : i. Calculation of Amount of Debtors to be shown in the balance sheet. Rs. 1,00,000 No adjustment is required. ii. Calculation of amount of Net Profit Profit and Loss Account To Bad debts 1,000 By Gross Profit 50,000 To Net Profit 49,000 50,000 50,000 ii. Bad Debts given in the Adjustments only Illustration :2. From the following particulars calculate Amount of Debtors balance to be shown in the balance sheet and amount of Net Profit assuming that all other items are not relevant. Sundry debtors as per trial balance 1, 00,000 Gross profit as per trial balance 50,000 Bad debts as per Adjustments 2,000 Solution : i. Calculation of Amount of Debtors to be shown in the balance sheet. Sundry debtors 1,00,000 Less : Bad debts 2,000 98,000 ii. Calculation of amount of Net Profit Profit and Loss Account To Bad debts 2,000 By Gross Profit 50,000 To Net Profit 48,000 50,000 50,000 iii. Bad Debts given in the both Trial Balance and Adjustments Illustration :3. From the following particulars calculate Amount of Debtors balance to be shown in the balance sheet and amount of Net Profit assuming that all other items are not relevant. Sundry debtors as per trial balance 1, 00,000 Gross profit as per trial balance 50,000 Bad debts as per trial balance 1,000 Bad debts as per adjustments 2,000 Solution : i. Calculation of Amount of Debtors to be shown in the balance sheet. Sundry debtors 1,00,000

65 Less : Bad debts 2,000 98,000



ii. Calculation of amount of Net Profit Profit and Loss Account To Bad debts 2,000 By Gross Profit 50,000 Existing T.B. 1,000 Add: New Adj. 2,000 3,000 To Net Profit 47,000

50,000 50,000 iv. Provision for Bad Debts given in the Trial Balance only. Illustration :4. From the following particulars calculate Amount of Debtors balance to be shown in the balance sheet and amount of Net Profit assuming that all other items are not relevant. Sundry debtors as per trial balance 1,00,000 Gross profit as per trial balance 50,000 Bad debts as per trial balance 1,000 Bad debts as per adjustments 2,000 Provision for bad debts as per adjustments 800 Solution : i. Calculation of Amount of Debtors to be shown in the balance sheet. Sundry debtors 1,00,000 Less : Bad debts 2,000 98,000 ii. Calculation of amount of Net Profit Profit and Loss Account To Bad debts 2,000 By Gross Profit 50,000 Existing T.B. 1,000 Add: New Adj. 2,000 3,000 To Provision for bad debts 800 To Net Profit 47,000 50,000 50,000 v. Provision for Bad Debts given in Adjustments only Illustration :5. From the following particulars calculate Amount of Debtors balance to be shown in the balance sheet and amount of Net Profit assuming that all other items are not relevant. Sundry debtors as per trial balance 1,00,000 Gross profit as per trial balance 50,000 Bad debts as per trial balance 1,000 Bad debts as per adjustments 2,000 Provision for bad debts 2% on debtors as per adjustments. Solution : i. Calculation of Amount of Debtors to be shown in the balance sheet. Sundry debtors 1,00,000 Less : Bad debts Adjustments. 2,000 98,000 Less : Provision for bad debts Adjustments. 2,000

66 1,00,000x2%. 96,000



ii. Calculation of amount of Net Profit Profit and Loss Account To Bad debts Trial Balance. 1,000 By Gross Profit 50,000 To Bad debts Adjustments. 2,000 3,000 To Provision for bad debts 2,000 To Net Profit 45,000 50,000 50,000 vi. Provision for Bad Debts given in both Trial Balance and Adjustments. a. Increase Illustration :6. From the following particulars calculate Amount of Debtors balance to be shown in the balance sheet and amount of Net Profit assuming that all other items are not relevant. Sundry debtors as per trial balance 1,00,000 Gross profit as per trial balance 50,000 Bad debts as per trial balance 1,000 Bad debts as per adjustments 2,000 Provision for Bad debts as per trial balance 800 Provision for bad debts 2% on debtors as per adjustments. Solution : i. Calculation of Amount of Debtors to be shown in the balance sheet. Sundry debtors 1,00,000 Less : Bad debts Adjustments. 2,000 98,000 Less : Provision for bad debts Adjustments. 1,960 98,000x2%. 96,040 ii. Calculation of amount of Net Profit Profit and Loss Account To Bad debts Trial Balance. 1,000 By Gross Profit 50,000 To Bad debts Adjustments. 2,000 3,000 To Provision for bad debts Adjustments. 1,960 Less: Provision for Bad debts Trial Balance. 800 1,160 To Net Profit 45,840 50,000 50,000 b. Decrease Illustration :7. From the following particulars calculate Amount of Debtors balance to be shown in the balance sheet and amount of Net Profit assuming that all other items are not relevant. Sundry debtors as per trial balance 1,00,000 Gross profit as per trial balance 50,000 Bad debts as per trial balance 1,000 Bad debts as per adjustments 2,000

67 Provision for Bad debts as per trial balance 2,100 Provision for bad debts 2% on debtors as per adjustments.



Solution : i. Calculation of Amount of Debtors to be shown in the balance sheet. Sundry debtors 1,00,000 Less : Bad debts Adjustments. 2,000 98,000 Less : Provision for bad debts Adjustments. 1,960 98,000x2%. 96,040 ii. Calculation of amount of Net Profit Profit and Loss Account To Bad debts Trial Balance. 1,000 By Gross Profit 50,000 To Bad debts Adjustments. 2,000 3,000 By P.B.D T.B. 2,100 To Net Profit 47,140 By P.B.D Adjustment. 1,960 140 50,140 50,140 vii. Provision for Discount given in the Trial Balance only Illustration :8. From the following particulars calculate Amount of Debtors balance to be shown in the balance sheet and amount of Net Profit assuming that all other items are not relevant. Sundry debtors as per trial balance 1,00,000 Gross profit as per trial balance 50,000 Bad debts as per trial balance 1,000 Bad debts as per adjustments 2,000 Provision for Bad debts as per trial balance 800 Provision for Discount as per trial balance 300 Provision for bad debts 2% on debtors as per adjustments. Solution : i. Calculation of Amount of Debtors to be shown in the balance sheet. Sundry debtors 1,00,000 Less : Bad debts Adjustments. 2,000 98,000 Less : Provision for bad debts Adjustments. 1,960 98,000x2%. 96,040 ii. Calculation of amount of Net Profit Profit and Loss Account To Bad debts Trial Balance. 1,000 By Gross Profit 50,000 To Bad debts Adjustments. 2,000 3,000 To Provision for bad debts Adjustments. 1,960 Less: Provision for Bad debts Trial Balance. 800 1,160 To Provision for Discount 300 860 To Net profit 46,140

68 50,000 50,000



viii. Provision for Discount given in the Adjustments only Illustration :9. From the following particulars calculate Amount of Debtors balance to be shown in the balance sheet and amount of Net Profit assuming that all other items are not relevant. Sundry debtors as per trial balance 1,00,000 Gross profit as per trial balance 50,000 Bad debts as per trial balance 1,000 Bad debts as per adjustments 2,000 Provision for Bad debts as per trial balance 800 Provision for Discount 1% Provision for bad debts 2% on debtors as per adjustments. Solution : i. Calculation of Amount of Debtors to be shown in the balance sheet. Sundry debtors 1,00,000 Less : Bad debts Adjustments. 2,000 98,000 Less : Provision for bad debts Adjustments. 1,960 98,000x2%. 96,040 Less : Provision for Discount 1% 960 95,080 ii. Calculation of amount of Net Profit Profit and Loss Account To Bad debts Trial Balance. 1,000 By Gross Profit 50,000 To Bad debts Adjustments. 2,000 3,000 To Provision for bad debts Adjustments. 1,960 Less: Provision for Bad debts Trial Balance. 800 1,160 To Provision for Discount 1% 960 200 To Net profit 46,800 50,000 50,000 ix. Provision for Discount given in both Trial Balance and Adjustments Illustration :10. From the following particulars calculate Amount of Debtors balance to be shown in the balance sheet and amount of Net Profit assuming that all other items are not relevant. Sundry debtors as per trial balance 1,00,000 Gross profit as per trial balance 50,000 Bad debts as per trial balance 1,000 Bad debts as per adjustments 2,000 Provision for Bad debts as per trial balance 800 Provision for Discount as per trial balance 300 Provision for Discount 1%

69 Provision for bad debts 2% on debtors as per adjustments.



Solution : i. Calculation of Amount of Debtors to be shown in the balance sheet. Sundry debtors 1,00,000 Less : Bad debts Adjustments. 2,000 98,000 Less : Provision for bad debts Adjustments. 1,960 98,000x2%. 96,040 Less : Provision for Discount 1% 960 95,080 ii. Calculation of amount of Net Profit Profit and Loss Account To Bad debts Trial Balance. 1,000 By Gross Profit 50,000 To Bad debts Adjustments. 2,000 3,000 To Provision for bad debts Adjustments. 1,960 Less: Provision for Bad debts Trial Balance. 800 1,160 To Provision for Discount 1% 960 Less : Provision for Discount Trial Balance. 300 660 To Net Profit 45,180 50,000 50,000 x. Manager Commission before charging such commission. Illustration :11. Gross Profit 1,00,000 Expense as per Profit and Loss A/C 80,000 Manager Commission 2% before charging such commission. Solution: Calculation of Manager Commission Gross Profit 1,00,000 Less : Expenses 80,000 Net profit before commission 20,000 Less : Manager Commission20,000x2/100. 400 Net Profit ` 19,600 xi. Manager Commission after charging such commission. Illustration :12. Gross Profit 1,00,000 Expense as per Profit and Loss A/C 80,000 Manager Commission 2% after charging such commission. Solution: Calculation of Manager Commission Gross Profit 1,00,000 Less : Expenses 80,000 Net Profit before commission 20,000

70 Less : Manager Commission20,000x2/102. 392 Net Profit 19,608



5.7.2. Preparation of Trading Account Illustration: 13.The following balances were extracted from the books of a sole trader Mr.Anchaneyar on 30th June 2007. Prepare Trading Account for the above period:

Rs. Opening Stock 2,000 Closing Stock 1,500 Returns Inward 300 Returns Outward 200 Wages 350 Purchases 4,000 Sales 7,000 Freight 100 Carriage 75 Solution:

Trading Account for the year ended on 30th June 2007 Particulars Rs. Rs. Particulars Rs. Rs.

To Opening Stock 2,000 By Sales 7,000 To Purchases 4,000 Less: Returns 300 6,700 Less: Returns 200 3,800 By Closing Stock 1,500 To Wages 350 To Freight 100 To Carriage 75 To Gross Profit 1,875 8,200 8,200 5.7.3. Preparation of Manufacturing Account Illustration :14. From the following particulars of Mr. Bhagawan, prepare Manufacturing Account for the year ended 31 st December 2007.

Rs. Rs. Purchase of raw materials 13,195 Interest Bank Loan 600 Returns Inward 70 Stock, 1 st Jan. 2007 Stock on 31st Dec. 2007 Raw Materials 400 Raw Materials 1,210 Work-in-progress 300 Work-in-progress 1,000 Finished Goods 410 Finished Goods 1,370 Sales 19,500 Productive Wages 2,000 Returns Outward 85 Factory Expenses 1,840 Carriage Outward 105 Office Expenses 300 Carriage Inward 100 Salaries 600 Discount Allowed 10 Distributing Expenses 100 Sale of Scrap 20 Selling Expenses 700 Depreciation on Machinery 500 Purchase Expenses 600 Repairs to Machinery 100 Export Duty 300 Depreciation on Office furniture 40 Import Duty 200

71 Solution : Manufacturing Account for the year ended on 31st December 2007



Particulars Rs. Particulars Rs. To Work- in-Progress 300 By Sales of Scrap 20 To Materials Consumed: By Work- in-Progress 1,000 Opening Stock 400 By Cost of Finished goods 16,920 Purchases : 13,195

Less : Returns 85 13,110 13,510 Less : Closing Stock 1,210 12,300 To Wages 2,000 To Factory Expenses 1,840 To Purchase Expenses 600 To Import Duty 200 To Carriage Inward 100 To Depreciation of Machinery 500 To Repairs to Machinery 100

17,490 17,490 5.7.4. Preparation of Profit and Loss Account Illustration: 15. From the following figures, prepare profit and loss account of Mr. Cheran for the year ending 31 st December 2007. Rs. Rs. Salaries and wages 3,000 Advertising 1,000 Commission paid 200 Discount allowed 1,800 Postage and telegram 150 Rent received 1,700 Insurance 300 Interest on Investment 1,500 Interest paid 400 Bad debts 900 Carriage out 500 Brokerage paid 95 The gross profit was 45% of sales, which amounted to Rs. 65,000 Solution :

Profit and loss A/c of Mr. Cheran for the year ending on 31 st December 2007. Particulars Rs. Particulars Rs.

To salaries 3,000 By Gross Profit 65,000 x 45%. 29,250 To Commission 200 By Rent received 1,700 To Postage and Telegram 150 By Interest on Investment 1,500 To Insurance 300 To Interest 400 To Carriage out 500 To Advertisement 1,000 To discount allowed 1,800 To bad debts 900 To Brokerage 95 To Net Profit 24,105

32,450 32,450

72 5.7.5. Preparation of Balance Sheet



Illustration :16. From the following balances of Mr. Dinesh for the year ended 31 st December 2007.

Rs Capital 2,00,000 Closing Stock 40,000 Fixed Assets 62,000 Sundry Debtors 2,00,000 Net Profit 42,000 Creditors 75,000 Liabilities for Expenses 11,000 Drawings 6,000 Cash and bank 20,000 Solution:

Balance Sheet of Dinesh as on 31 st December 2007 Liabilities Rs Rs Assets Rs Rs

Capital 2,00,000 Fixed Assets 62,000 Add: Net Profit 42,000 Stock 40,000 2,42,000 Debtors 2,00,000 Less: Drawings 6,000 2,36,000 Cash and bank 20,000 Sundry Creditors 75,000 Liabilities for Expen 11,000 3,22,000 3,22,000 5.7.6. Preparation of Final Accounts with Single Adjustment Illustration :17. From the following trial balance of Mr. Elangovan prepare Trading and Profit & Loss Account for the year ended 31-12-2007 and Balance Sheet as on that date. Stock as on 31-12-2007 is Rs.62,000 Debit Rs. Credit Rs. Cash in hand 2,250 Cash at bank 17,750 Stock 1-1-2002 36,000 Purchases 1,20,000 Carriage inwards 4,200 Factory Rent 6,000 Return outwards 2,000 Sales 2,72,000 Sundry debtors 28,000 Sundry Creditors 33,000 Wages 12,000 Rent 6,000 Salaries 8,600 Bills receivable 4,000 Bills payable 3,000 Bank loans 20,000 Insurance 1,200 Advertisement 800 Discount 1,400 Reserve fund

73

2,400



Furniture 6,000 Machinery 40,000 Business premises 50,000 Bad debts 400 Drawings 12,000 Income Tax 4,000 Return inwards 6,000 Capital 31,800 Loan on mortgage 2,400 3,66,600 3,66,600 Solution :

Trading Account for year ending 31 st December 2007. Particulars Rs Amount

Rs Particulars Rs. Amount

Rs. To Stock 36,000 By Sales. 2,72,000 To Purchases 1,20,000 Less: Returns 6,000 2,66,000 Less: Returns 2,000 1,18,000 By Closing Stock 62,000 To Carriage Inwards 4,200 To Factory Rent 6,000 To Wages 12,000 To Gross Profit 1,51,800

3,28,000 3,28,000

Profit & Loss Account for year ended 31st December 2007.

Particulars Rs. Particulars Rs. To Rent 6,000 By Gross Profit 1,51,800 To Salaries 8,600 To Insurance 1,200 To Advertisement 800 To Discount 1,400 To Bad Debts 400 To Net profit 1,33,400 1,51,800 1,51,800

Balance Sheet as on 31st December.2007

Liabilities Rs Amount Rs.

Assets Amount Rs.

Sundry Creditors 33,000 Cash in hand 2,250 Bills Payable 3,000 Cash at Bank 17,750 Bank Loans 20,000 Sundry Debtors 28,000 Reserve fund 2,400 Bills Receivable 4,000 Loan on Mortgage 2,400 Furniture 6,000 Capital 31,800 Machinery 40,000 Add: Net Profit 1,33,400 Business Promises 50,000

1,65,200

Closing Stock

74

62,000



Less: Drawings 12,000 1,53,200 Less: Income Tax 4,000 1,49,200

2,10,000 2,10,000 Illustration: 18. From the following Trial Balance of Mr. Fazhil, prepare Trading and profit and Loss Account for the year ended 31.12.2007 and Balance Sheet as on that date : Dr. Cr. Purchases and sales 70,000 1,27,000 Opening stock 28,000 Plant and machinery 98,000 Sundry debtors and creditors 27,000 25,000 Capital 1,00,000 Returns inward and outward 1,000 1,275 Discount allowed and received 350 800 Bank charges 75 Salary 16,800 Carriage inward 750 Carriage Outward 1,200 Rent, rate and taxes 2,000 Advertisement 2,000 Cash at Bank 6,900 2,54,075 2,54,075 The stock on 31.12.2007 was valued at Rs.35,000. Solution :

Trading Account for the year ending 31st December, 2002 Particulars Rs. Particulars Rs.

To Opening stock 28,000 By Sales 1,27,000 To Purchases 70,000 Less : Returns Less : Returns 1,275 68,725 In wards 1,000 1,26,000 To Carriage inwards 750 By Stock 35,000 To Gross Profit 63,525

1,61,000

1,61,000

Profit & Loss Account for the year ending 31st December, 2007 Particulars Rs Particulars Rs

To Discount allowed 350 By Gross profit 63,525 To Bank charges 75 By Discount received 800 To salaries and wages 16,800 To carriage outwards 1,200 To Rent, rates, taxes 2,000 To Advertisements 2,000 To Net Profit 41,900

64,325 64,325

75

Balance Sheet as on 31st December, 2007



Liabilities Rs. Assets Rs. Creditors 25,000 Cash at Bank 6,900 Capital Stock 35,000 Balance 1,00,000 Sundry debtors 27,000 Add: Net Profit 41,900 1,41,900 Plant and machinery 98,000

1,66,900 1,66,900

5.7.7. Preparation of Final Accounts with several Adjustments Illustration:19. Consider the following the balances extracted form the books of Mr. Govindhan as on 31st December 2007 prepare the final accounts Rs. Rs. Capital 20,000 Office Salaries 6,600 Debtors 8,000 Rent 3,900 Creditors 10,000 Trade expenses 2,300 Purchases 60,000 Furniture 10,000 Sales 80,000 Cash in hand 2,400 Opening stock 12,000 Drawings 4,800 Adjustments: Salaries outstanding for December 2007 amounting to Rs. 600. Rent paid in advance for January 2005 Rs.300. Depreciation on furniture @ 10% p.a. Provide interest on capital for the year @ 5% p.a. Stock on 31st December 2007 Rs. 14,000. Solution:

Trading Account for the year ended 31st December 2007

Particulars Rs. Particulars Rs. To Opening Stock 12,000 By Sales 80,000 To Purchases 60,000 By Closing Stock 14,000 To Gross Profit 22,000 94,000 94,000

Profit and Loss Account for the year ended 31st December, 2007

Particulars Rs. Rs. Particulars Rs. To Salaries 6,600 By Gross Profit 22,000 Add: Outstanding 600 7,200 To Rent 3,900 Less : Prepaid 300 3,600 To Trade Expenses 2,300 To Depreciation on Furniture 1,000 To Interest on Capital 1,000 To Net Profit 6,900

22,000 22,000

Balance Sheet as on 31st December 2007

Liability Rs. Assets Rs. Creditors 10,000 Furniture 10,000 Salary Outstanding 600 Less: Depreciation 1,000 9,000 Capital :

20,000

Debtors

76

8,000



Add: Interest 1,000 Cash 2,400 Add: Net Profit 6,900 Rent paid in Advance 300 27,900 Stock 14,000 Less : Drawings 4,800 23,100

33,700 33,700

Illustration: 20. From the following trial balance of Mr. Hari prepare Trading and profit and Loss Account for the year ended December 31, 2007 and Balance Sheet as on that date : Debit Credit Rs. Rs. Capital 40,000 Sales 25,000 Purchases 15,000 Salaries 2,000 Rent 1,500 Insurance 300 Drawings 5,000 Machinery 28,000 Bank Balance 4,500 Cash 2,000 Stock 01.01.2007 5,200 Debtors 2,500 Creditors 1,000 66,000 66,000 Adjustments : Stock on 31.12.2007 Rs.4,900. Salary unpaid Rs.300. Rent paid in advance Rs.200. Insurance Prepaid Rs.90 Solution:

Trading Account for the year ending 31st December 2007 Particulars Rs. Particulars Rs.

To Opening Stock 5,200 By Sales 25,000 To Purchases 15,000 By Stock 4,900 To Gross Profit 9,700

29,900 29,900 Profit & Loss Account for the year ended 31st December 2007

Particulars Rs. Rs. Particulars Rs To Salaries 2,000 By Gross Profit 9,700 Add : Unpaid 300 2,300 To Rent 1,500 Less : Advance 200 1,300 To Insurance 300 Less : Prepaid 90 210 To Net Profit 5,890

9,700 9,700 77

Balance Sheet as on 31st December, 2007



Liabilities Rs. Assets Rs. Capital 40,000 Cash 2,000 Add : Net Profit 5,890 Bank Balance 4,500 45,890 Stock 4,900 Less : Drawings 5,000 40,890 Rent prepaid 200 Creditors 1,000 Insurance prepaid 90 Salaries unpaid 300 Debtors 2,500 Machinery 28,000

42,190 42,190 Illustration: 21. From the following Trail Balance and additional information pertaining to Mr. Indian, prepare Trading and Profit and loss Account and Balance Sheet : Stock on 01.04.2007 15,000 Sales 1,07,800 Purchases 62,400 Return outwards 2,400 Wages 10,600 Sundry creditors 32,500 Carriage in 1,400 Outstanding wages 1,400 Plant and Machinery 35,000 Capital 1,00,000 Coal, Gas, water 2,500 Discount 1,800 Trade Expenses 1,500 Bank overdraft 20,000 Furniture 5,000 Loose Tools 3,200 Depreciation on Plant & machinery 2,000 Salaries 4,500 Bank charges 500 Sundry debtors 15,000 Factory premises 1,00,000 Commission 1,000 Sales Returns 2,800 Drawings 3,000 Insurance 500 2,65,900 2,65,900 Adjustments : Stock on 31.03.2007 is valued at Rs.30,000. Interest on overdraft outstanding Rs.1000. Three months insurance paid in advance. Loose tools are to be valued at Rs.2,000. Provide 10 % depreciation on furniture and 5% on Factory premises. Solution:

Trading Account for the year ending 31.03.2007. Particulars Rs. Particulars Rs.

To Stock 15,000 By Sales 1,07,800

To Purchase 62,400 Less: Returns 2,800 1,05,000 Less: Returns 2,400 60,000 By Closing Stock 30,000 To Wages 10,600 To Carriage 1,400 To Coal, gas, water 2,500 To Gross Profit 45,500

1,35,000 1,35,000

78

Profit & Loss Account for the year ending 31.03.2007.



Particulars Rs Particulars Rs. To Trade expenses 1,500 By Gross profit 45,500 To Depreciation on Plant 2,000 By Discount 1,800 To Salaries 4,500 To Back Charges 500 To Commission 1,000 To Insurance 500 Less: Paid in advance 125 375 To Dep. on Furniture 500 To Dep. on Premises 500 To Loose Tools- Loss 1,200 To Interest Outstanding 1000 To Net Profit 29,725

47,300 47,300 Balance Sheet as on 31st December, 2007

Liabilities Rs Rs. Assets Rs. Rs. Outstanding wages 1,400 Stock 30,000 Bank overdraft 20,000 Loose tools 2,000 Interest Outstanding 1,000 Insurance Prepaid 125 Sundry creditors 32,500 Debtors 15,000 Capital 1,00,000 Furniture 5,000 Add: Net Profit 29,725 Less:Depreciation 500 4,500 1,29,725 Factory Premises 1,00,000 Less: Drawings 3,000 1,26,725 Less:Depreciation 5,000 95,000

Plant & Machinery 35,000

1,81,625 1,81,625 Note : Depreciation on Plant and Machinery has been Credited to Plant and Machinery before preparation of Trial Balance. Therefore, it will appear only on debit side of Profit and Loss Account. Similarly, ‘Outstanding wages’ has been adjusted before preparation of Trial Balance. thus, it will also be shown only on liabilities side of the balance sheet. Illustration: 22. The Following is the Trial Balance of Mr. Jayaraman Agencies as on 31 st March 2007. Prepare Trading and Profit and Loss Account for the year ended 31 st March 2007 and a Balance Sheet as on that date : Rs. Rs. Capital 1,00,000 Buildings 15,000 Drawings 18,000 Motor Van 25,000 Furniture 7,500 Loan from Mr. A @ 12% 15,000 Interest Paid 900 Sales 1,00,000 Purchases 75,000 Opening Stock 25,000 Establishment 15,000 Wages

2,000

79



Insurance 1,000 Commission 7,500 Sundry Debtors and Creditors 28,100 10,000 Bank 20,000 2,32,500 2,32,500 Adjustments : Closing Stock Rs. 32,000. Outstanding wages Rs. 500. Prepaid Insurance Rs. 300. Commission received in advance Rs. 800. Interest on capital 10% p.a. Depreciate building by 2.5%, furniture by 10% and motor van by 10%. Interest on drawings Rs. 500 Solution :

Trading Account for the year ended 31st March 2007 Particulars Rs. Rs. Particulars Rs.

To Opening Stock 25,000 By Sales 1,00,000 To Purchases 75,000 By Closing Stock 32,000 To Wages 2,000 Add: Outstanding 500 2,500 To Gross Profit 29,500

1,32,000 1,32,000 Profit & Loss Account for the year ended 31st March 2007

Particulars Rs Rs Particulars Rs Rs To Insurance 1,000 By Gross Profit 29,500 Less : Prepaid 300 700 By Interest Drawings 500 To Interest on Loan 900 By Commission 7,500 Add : Outstanding 900 1,800 Less : Advance 800 6,700 To Establishment 15,000 To Depreciation Buildings 375 Furniture 750 Motor Van 2,500 3,625 To Interest on Capital 10,000 To Net Profit 5,575

36,700 36,700 Balance Sheet as on 31st March 2007

Liabilities Rs. Assets Rs. Outstanding Wages 500 Cash at Bank 20,000 Commission in Advance 800 Sundry Debtors 28,100 Sundry Creditors 10,000 Closing Stock 32,000 Loan from A 15,000 Prepaid Insurance 300 Add: Interest 900 15,900 Buildings 15,000 Capital 1,00,000 Less: Depreciation 375 14,625 Add: Net Profit 5,575 Furniture & Fittings 7,500 Interest on Capital 10,000 Less: Depreciation 375 14,625 1,15,575 Motor Van 25,000 Less : Drawings 18,000 Less : Depreciation 750 6,750 97,575 Less: Interest on Draws 500 97,075

1,24,275 1,24,275

80



Illustration:23. The following are the balances extracted from the books of Mr. Kannan as on 31.12.2007. Prepare Trading and Profit and Loss Account for the year ending 31.12.2007 and a Balance Sheet as on that date.

Debit Balances Rs. Credit Balances Rs. Drawings 4,000 Capital 20,000 Cash at Bank 1,700 Sales 16,000 Wages 6,500 Sundry Creditors 4,500 Purchases 2,000 Stock 01.01.2007 6,000 Buildings 10,000 Sundry Debtors 4,400 Bills Receivable 2,900 Rent 450 Commission 250 General Expenses 800 Furniture 500 40,500 40,500 Adjustments: Stock on 31.12.2007 was Rs. 4,000. Interest on capital at 6% to be provided. Interest on Drawings at 5% to be provided. Wages yet to be paid Rs. 100.Rent prepaid Rs. 50. Solution:

Trading Account for the year ending 31st December 2007 Particulars RS. Particulars RS.

To Opening Stock 6,000 By Sales 16,000 To Purchases 2,000 By Closing Stock 4,000 To Wages 1,000 Add: Outstanding 100 1,100 To Gross Profit 10,900 20,000 20,000

Profit & Loss Account for the year ended 31 st December 2007 Particulars Rs Rs Particulars Rs

To Rent 450 By Gross Profit 10,900 Less: Prepaid 50 400 By Interest on drawings 200 To Interest on capital 1,200 To Commission 250 To General Expenses 800 To Net Profit 8,450 11,100 11,100

Balance Sheet as on 31 st December 2007 Liabilities Rs. Assets Rs.

Creditors 4,500 Cash in hand 6,500 Wages Outstanding 100 Cash at bank 1,700 Capital 20,000 Stock 4,000 Add: Net Profit 8,450 Rent prepaid 50 Interest 1,200 Debtors 4,400 29,650 B/R 2,900 Less: Drawings 4,000 Furniture 500 25,650 Less: Interest 200 25,450 Buildings

10,000

30,050 30,050 81



Illustration: 24 . Form the following Trial Balance and the adjoining information provided by Mr. Logesh, prepare a Trading and Profit and Loss Account for the year ending 31 st March 2007 and a Balance Sheet as on that date : Dr. Rs Cr. Rs Land and Buildings 20,000 Machinery 50,000 Furniture 4,000 Opening Stock 16,300 Purchases 80,000 Salaries 6,000 Carriage on sales 1,500 Freight on purchases 2,000 Customs duty on purchases 3,000 Advertising 5,400 Wages 20,000 Rent 3,000 General Expenses 3,200 Postage and Stationery 1,500 Repairs to Machinery 2,000 9% Loan to Krishna 5,000 Prepaid Insurance 200 Sundry Debtors 20,000 Cash at Bank 3,350 Capital 80,000 Sundry Creditors 8,000 Discount received 400 Outstanding expenses 1,550 Sales 1,50,500 Provision for Repairs 6,000 2,46,450 2,46,450 Adjustments : i. Stock on 31st March 2007 amounted Rs. 14,900. ii. Machinery worth Rs. 10,000 was purchased on 1st October 2006. Wages Rs. 500 were paid to workmen for its installation which have been debited to wages account. iii. Depreciation is to be written off @ 3% on Land and Buildings 10% Machinery and 5% on Furniture. iv. Provision for repairs is to be credited with Rs. 1,500 every year. Solution:

Trading Account for the year ending 31st March 2007 Particulars Rs. Particulars Rs.

To Opening Stock 16,300 By Sales 1,50,500 To Purchases 80,000 By Stock 14,900 To Freight on Purchases 2,000 To Custom Duty 3,000 To Wages 20,000 Less: Capital Expenses 500 19,500 To Gross Profit 44,600

1,65,400 1,65,400

82



Profit & Loss Account for the year ended 31 st March 2007. Particulars Rs Particulars Rs

To Interest 5000x9%. 450 To Salaries 6,000 By Gross Profit 44,600 To Carriage 1,500 By Discount 400 To Advertisements 5,400 To Rent 3,000 To General Expenses 3,200 To Postage and Stationery 1,500 To Repairs to Machinery 2,000 To Provision for repairs 1,500 To Depreciation on L& B 600 To Depreciation on Furniture 200 To Depreciation on Machinery 4,000 + 525.

4,525

To Net Profit 15,125

45,000 45,000

Balance Sheet as on 31 st March 2007 Liabilities Rs Assets Rs.

Creditors 8,000 Cash at bank 3,350 Outstanding expenses 1,550 Stock 14,900 Provision for Repairs 9% Loan 5,000 6,000+1,500. 7,500 Debtors 20,000 Prepaid Insurance 200 Capital 80,000 Land and Building 20,000 Add : Net Profit 15,125 95,125 Less: Depreciation 600 19,400 Interest Outstanding 450 Furniture 4,000 Less: Depreciation 200 3,800 Machinery 50,000 Add: Capital Expdr 500 50,500 Less: Depreciation 4,525 45,975

1,12,625 1,12,625 Illustration: 25. The following are the ledger balances extracted form the books of Mr. Muthu. Rs. Rs. Capital 50,000 Sales 3,01,000 Bank Overdraft 8,400 Return inwards 5,000 Furniture 5,200 Discount Cr. 800 Business Premises 40,000 Taxes & Insurance 4,000 Creditors 26,600 General Expenses 8,000 Opening Stock 44,000 Salaries 18,000 Debtors 36,000 Commission allowed 4,400 Rent form tenants 2,000 Carriage on purchases 3,600 Purchases 2,20,000 Provision for Doubtful debts 1,000 Bad debts written off 1,600

83



Adjustments: Stock on hand on 31-12-2007 was estimated as Rs. 40,120. Write off depreciation on business premises Rs. 600 and furniture Rs.520. Make a provision of 5% on debtors for bad & doubtful debts. Allow interest on Capital at 5% and carry forward Rs.1,400 for unexpired insurance. Prepare Final Accounts for the year ended 31-12-2007. Solution:

Trading Account for the year ending 31 st December 2007 Particulars Rs Particulars Rs.

To Opening Stock 44,000 By Sales 3,01,000 To Purchases 2,20,000 Less: Returns 5,000 2,96,000 To Carriage on Purchases 3,600 By Closing Stock 40,120 To Gross Profit 68,250

3,36,120

3,36,120

Profit & Loss Account for the year ending 31st December 2007

Particulars Rs Rs Particulars Rs To Taxes & Insurance 4,000 By Gross Profit 68,520 Less: Prepaid 1,400 2,600 By Rent 2,000 To General Expenses 8,000 By Discount 800 To Salaries 18,000 To Commission 4,400 To Bad Debts 1,600 To Provision for Bad Debts 1,800 Less: Existing Provision 1,000 800 To Depreciation: Business Premises 600 Furniture 520 To Int. on Capl 50,000x5%. 2,500 To Net Profit 32,300 71,320 71,320

Balance Sheet as on 31st December, 2007 Liabilities Rs. Assets Rs.

Creditors 26,600 Debtors 36,000 Bank overdraft 8,400 Less: P. B.D 1,800 34,200 Capital 50,000 Stock 40,120 Add: Net Profit 32,300 Prepaid Insurance 1,400 Interest on Capital 2,500 84,800 Furniture 5,200 Less: Depreciation 520 4,680 Business Premises 40,000

Less: Depreciation 600 39,400

1,19,800 1,19,800

84



Illustration: 26. From the following Trial Balance of Mr. Naveen prepare a Trading and profit and Loss Account for the year ended December 31, 2007 and a Balance Sheet as on that date : Dr. Rs Cr. Rs Capital 4,250 Drawings 710 Plant & Machinery 950 Stock on 1st January 1,460 Purchases and Sales 10,362 11,906 Purchases and Sales returns 210 291 General Expenses 440 Rent 120 Rates 200 Apprentice Premium 80 Bank overdraft 240 Bank Debts 172 Debtors & Creditors 4,200 2,000 Cash on hand 48 Bad Debts reserve 105 18,872 18,872 Adjustments: Depreciate Plant & Machinery at 10% p.a. Increase bad debts reserve to 5% on sundry debtors. Rent accrued in Rs. 40 Rates of Rs. 80 are paid in advance. Stock on hand as on 31st December is Rs. 1,700. Apprentice premium received in advance is Rs. 20 Solution:

Trading Account for the year ended 31st December 2007. Particulars Rs. Rs. Particulars Rs Rs.

To Stock 1,460 By Sales 11,906

To Purchases 10,362 Less: Returns 210 11,696 Less: Returns 291 10,071 By Stock 1,700 To Gross Profit 1,865 13,396 13,396

Profit & Loss Account for the year ended 31st December, 2007

Particulars Rs Rs Particulars Rs Rs To General expenses 440 By Gross Profit 1,865 To Rent 120 By Apprentice Prm 80 Add: Accrued 40 160 Less: Advance 20 60 To Rates 200 Less: Advance 80 120 To Bad Debts 172 To P.B.D Adjustment. 210 Less: P.B.D TrialBal. 105 105 To Depreciation on P&M 95 To Net Profit 833

1,925 1,925

85



Balance Sheet as on 31st December 2007 Liabilities Rs. Assets Rs.

Rent Accrued 40 Cash in hand 48

Apprentice Prem Adv. 20 Stock 1,700

Bank overdraft 240 Rates paid in advance 80

Creditors 2,000 Debtors 4,200

Capital : 4,250 Less: P.B.D 210 3,990

Add: Net Profit 833 Plant & Machinery 950

5,083 Less: Depreciation 95 855

Less Drawings 710 4,373

6,673 6,673

Illustration: 27. The following are the balances extracted from the books of Mr. Oliver as on 31 st December 2007. Rajesh’s capital 20,000 Reserve for discount on Debtors 200 Drawings 3,500 Loan at 9% 5,000 Building 10,000 Salaries 4,400 Machinery 2,500 Wages 7,500 Furniture and fittings 600 Rent 2,750 Opening Stock 12,500 Traveling expenses 1,250 Cycle 400 Postage and telegram 135 Purchase 75,000 Rate and tax 90 Sales 1,25,000 Carriage inward 2,500 Sales return 5,000 Bad debts 300 Duty paid on purchase 15,000 Carriage outwards 750 Sundry debtors 10,000 Interest paid 375 Sundry creditors 7,500 General charges 900 Reserve for bad debts 400 Cash on hand 250 Cash at bank 2,400 Adjustments : Stock on 31-12-2007 Rs. 14,000. Provide the following outstanding : salary Rs.400 Rent Rs.250 Wages Rs.600 and Interest outstanding Rs.75. Maintain the reserve for doubtful debtors at 5% and reserve for Discount on debtors at 2 ½ %. Provide depreciation for Building 2 ½ %, Machinery 10%, Furniture 6% and Cycle 15%. Prepare trading and profit loss A/c for the year ended 31.12.2007 and a balance sheet on that date Solution:

Trading Account for the year ending December 31.2007 Particulars Rs Particulars Rs

To Opening Stock 12,500 By Sales 1,25,000 To Purchase 75,000 Less: Returns 5000 1,20,000 Add: Duty 15,000 90,000 By Stock 14,000 To Wages 7,500 Add: Outstanding 600 8,100 To Carriage inward 2500 To Gross Profit 20,900

1,34,000 1,34,000

86



Profit & Loss Account for the year ended 31 December 2007 Particulars Rs Particulars Rs

To Salaries 4,400 By Gross Profit 20,900 Add: Outstanding 400 4,800 To Rent 2,750 Add: Outstanding 250 3,000 To Traveling expenses 1,250 To Postage 135 To Rent and Tax 90 To Bad Debts 300 To Carriage outwards 750 To Interest 375 Add: Outstanding 75 450 To General charges 900 To Depreciation: Building Machinery Furniture Cycle

250 250 36 60

To P.B.D Adjustment. Less: P.B.DTri.Bal.

500 400

100

To Provision for DisAdj. Less: P.B.DTri.Bal.

238 200

38

To Net Profit 8,491

20,900 20,900

Balance Sheet as on December 31, 2007 Liabilities Rs Asset Rs.

Outstanding: Cash 250 Salary 400 Cash at bank 2,400 Wages 600 Stock 14,000 Rent 250 Debtors 10,000 Interest 75 Less: P.B.D 10,000x5%. 500 Creditors 7500 9,500 Loan 5000 Less: P.D 9,500x2.5%. 238 9,262 Capital: Add: Net Profit

20,000 8,491

Building Less: Depreciation

10,000 250

9750

28,491 Machinery Less: Depreciation

2,500 250

2,250

Less: Drawings 3,500 24,991 Furniture Less: Depreciation

600 36

564

Cycle Less: Depreciation

400 60

340

38,816 38,816

87



Illustration: 28. The following trial balance was extracted from the books of Mr. Prem as on 31st December 2007

Debit balances Rs. Credit balances Rs. Plant and Machinery 20,000 Capital account 80,000 Manufacturing wages 34,500 Sundry creditors 44,560 Salaries 15,850 Bank loan 15,000 Furniture 10,000 Purchase Returns 1,740 Freight on purchase 1,860 Sales 2,50,850 Freight on sales 2,140 Provision for bad debts 2,000 Buildings 24,000 Manufacturing expenses 9,500 Insurance 4,250 Good will 25,000 General expenses 8,200 Factory fuel and power 1280 Sundry debtors 78,200 Factory lighting 950 Opening Stock 34,200 Motor car 12,000 Purchase 1,02,000 Sales Returns 3,100 Bad Debts 1,400 Interest and bank charges 400 Cash at bank 4,200 Cash in hand 1,120 Prepare the trading and profit loss account and balance sheet after taking into consideration the following information: Stock in hand on 31st December 2007 was valued at Rs.30,500 Depreciate plant and Machinery by 10% , Furniture 5% and Motor car by Rs. 1,000. Bring provision for bad debts to 5% on sundry debtors. A commission of 1% on the G.P. is to be provided to works manager. Solution:

Trading Account for the year ending 31st December 2007 Particulars Rs Rs. Particulars Rs Rs.

To Opening Stock 34,200 By Sales 2,50,850 To Purchase Less: Returns

1,02,000 1,740

1,00,260

Less: Returns 3,100 2,47,750

To Freight on Purchase 1,860 By Stock 30,500` To Manufacturing wages 34,500 To Manufacturing Exp 9,500 To Factory Fuel& Power 1,280 To Factory lighting 950 To Gross Profit 95,700

2,78,250 2,78,250

Profit & Loss Account for the year ended 31 st December 2007 Particulars Rs. Particulars Rs

To Salaries 15,850 By Gross Profit 95,700 To Freight on sales 2,140 To Insurance and tax 4,250

88



To General expenses 8,200 To Bad debts 1,400 To Interest 400 To Depreciation: Plant Furniture Motor car

2000 500

1,000

To P.B.D Adjustment. Less: P.B.DTril Bal.

3,910 2,000

1,910

To W M Commission 95,700 x 1%.

957

To Net Profit 57,093

95,700 95,700 Balance Sheet as on 31st December, 2007

Liabilities Rs Rs. Assets Rs Rs. Creditors 44,560 Cash in hand 1,120 Bank loan 15,000 Cash at bank 4,200 Manager Commission 957 Stock 30,500 Capital Add: Net Profit

80,000 57,093

1,37,093

Plant and machinery Less: Depreciation

20,000 2,000

18,000

Furniture Less: Depreciation

10,000 500

9,500

Motor car Less: Depreciation

12,000 1000

11,000

Debtors Les: Provision

78,200 3,910

74,290

Buildings 24,000

Goodwill 25,000

1,97,610 1,97,610 Illustration: 29. From the following Trial Balance of Mr. Quick, prepare Trading and Profit and Loss Account for the year ended 31st December 2007 and a Balance Sheet as on that date after giving effect to the under mentioned adjustment. Rs.

Debit Balance Drawings 3,250 Stock opening. 17,445 Returns Inward 554 Deposit with Gupta 1,375 Carriage Outward 725 Loan to Ashok @ 5% 1-01-07 1,000 Rent 820 Purchase 12,970 Debtors 4,000 Good will 1,730 Advertisement 954 Bad Debts 400 Patents and patterns 500

89



Cash 62 Discount 330 Wages 754 Carriage Inward 1,240

Credit balances Capital 15,000 Returns Outward 840 Interest on Loan to Ashok 25 Rent Outstanding 130 Creditors 3,000 Provision for bad Debts 1,200 Sales 27,914 Adjustments: 1. The Manager is entitled to commission of 10% of the net profit after charging such commission. 2. Increase Bad Debts by Rs.600. 3. Make provision for Doubtful Debts at 10% and provision for Discount on Debtors at 5% 4. Stock valued at Rs. 1,500 destroyed by fire on 25th Dec.2007 but the Insurance Company admitted a claim for Rs. 950 only and paid it in January 2008. 5. Rs. 200 out of the Advertisement is to be carried forward to the next year. 6. The value of closing stock is Rs. 18,792. Solution:

Trading Account for the year ended 31st December 2007 Particulars Rs. Rs. Particulars Rs. Rs.

To Opening Stock 17,445 By Sales 27,914 To Purchases 12,970 Less: Returns 554 27,360 Less : Returns 840 12,130 By Closing Stock 18,792 To Wages 754 By Stock destroyed 1,500 To Carriage Inward 1,240 To Gross Profit 16,083

47,652 47,652

Profit & Loss Account for the year ended 31 st December 2007 Particulars Rs Rs Particulars Rs Rs

To Rent 820 By Gross Profit 16,083 To Advertisement Expenses Less: Prepaid

954 200

754

By Interest Add: Accrued

25 25

50

To Bad Debts Tril Bal. 400 By P.B.D Tril Bal. 1,200 Add: Bad Debts Adj. 600 1,000 Less: P.B.D Adj. 340 860 To Discount 330 To Loss on Stock by fire 550 To Carriage Outward 725 To Provision for Discount 153 To Commission to Manager 1,151 To Net Profit 11,510

16,993 16,993 90



Balance Sheet as at 31st December 2007 Liabilities Rs. Rs. Assets Rs. Rs.

Outstanding Rent 130 Cash 62 Commission payable 1,151 Deposit with Gupta 1,375 Creditors 3,000 Loan to Ashok 1,000 Capital 15,000 Add: Interest Accrued 25 1,025 Add: Net Profit 11,510 Insurance Company 950 26,510 Debtors 4,000 Less: Drawings 3,250 23,260 Less: Bad Debts Adj. 600 3,400 Less: P.B.D Adj. 340 3,060 Less: P.D.D Adj. 153 2,907 Stock 18,792 Prepaid Advertisement 200 Patents and Patterns 500

Good will 1,730

27,541 27,541 Illustration: 30. From the following Trial Balance Mr. Raj prepare final account for the year ended 31 st December 2007.

Debit Balances Rs. Credit Balances Rs Opening Stock 6,000 Capital 40,000 Salaries 6,000 Return Outwards 500 Drawings 6,000 Loan from Y 6%. 5,000 Carriage Inwards 1,000 Rent Outstanding 100 Carriage Outwards 500 Creditors 13,000 Return Inwards 800 Outstanding Expenses 1,900 Loan to X 8%. 3,000 Bad Debts Provision 1,000 Rent 1,200 Discount 300 Goodwill 5,000 Sales 73,700 Wages 100 Subletting Rent 500 Insurance Premium 600 Bank 8,500 Purchases 60,000 Debtors 30,000 Advertisements 3,000 Bad Debts 500 Discount 600 Cash 200 Furniture 3,000 Adjustments : Closing Stock Rs. 9,500. One Quarter of Insurance Premium falls in Next year. Provide depreciation on furniture at 10%. Goods worth Rs. 500 have been taken by the proprietor for Private use. Provide 5% for bad debts. Salaries Includes salary to the Proprietor @ Rs. 200 per month.

91



Solution: Trading Account for the year ended 31st December 2007

Particulars Rs. Rs. Particulars Rs Rs. To Opening Stock 6,000 By Sales 73,700 To Purchases 60,000 Less: Returns 800 72,900 Less: Returns 500 By Drawings 500 59,500 By Closing Stock 9,500 To Wages 100 To Carriage Inwards 1,000 To Gross Profit 16,300

82,400 82,400

Profit & Loss Account for the year ended 31 st December 2007 Particulars Rs Rs Particulars Rs

To Salaries 6,000 By Gross Profit 16,300 Less: Paid to Proprietor 2,400 3,600 By Discount 300 To Salaries to Proprietor 2,400 By Rent by subletting 500 To Carriage Outwards 500 By Interest accrued 240 To Rent 1,200 To Bad Debts 500 To P.B.DAdjustment. 1,500 Less : P.B.DTril Bal. 1,000 500 To Advertisement 3,000 To Discount 600 To Insurance Premium 600 Less : Unexpired 150 450 To Outstanding Interest 300 To Depreciation of Furniture 300 To Net Profit 3,990

17,340 17,340 Balance Sheet as on 31st December 2007

Liabilities Rs. Assets Rs. Creditors 13,000 Cash 200 Y’s Loan 5,000 Bank 8,500 Liability for other Exp 1,900 Debtors 30,000 Rent Outstanding 100 Less: P.B.DTril.Bal. 1,500 28,500 Interest Outstanding 300 Loan to X 3,000 Capital 40,000 Closing Stock 9,500 Add: Net Profit 3,990 Unexpired Insurance 150 43,990 Interest Accrued 240 Less : Drawings Cash. 6,000 Furniture 3,000 37,990 Less: Depreciation 300 2,700 Less: Drawings Goods. 500 37,490 Good will 5,000 57,790 57,790

92




5.8.1. Preparation of Trading Account Exercise: 1. Prepare Trading Account of Miss. Archana for the year ending 31.12.2007 from the following information :

Rs. Opening Stock 80,000 Purchases 8,60,000 Freight Inward 52,000 Wages 24,000 Sales 14,40,000 Purchase Returns 10,000 Sales Returns 3,16,000 Closing Stock 1,00,000 Import duty 30,000

5.8.2. Preparation of Manufacturing Account Exercise: 2. The following are the balances in the Ledger of Miss. Bharathi for the year ended 31 st March 2007. Rs. Opening Stock : Raw Materials 20,000 Work-in progress 3,000 Finished goods 10,800 Purchase of raw materials 50,000 Sales 2,40,000 Fuel and coal 1000 Wages 32,000 Factory expenses 40,000 Office expenses 30,000 Depreciation on Plant Machinery 3,000 Closing Stock : Raw Materials 20,000 Work-in-Progress 4,000 Finished goods 8,000 Prepare manufacturing Account for the year ended 31 st March 2007. Exercise : 3. The following are the balances in the Ledger of Miss. Chitra for the year ended 31 st March 2007

Rs. Stock on 01.01.2007 Raw Materials 10,000 Work-in-process 5,000 Finished goods 20,000 Stock on 31.12.2007 Raw Materials 5,000 Work-in-process 15,000 Finished goods 30,000 Purchase of Raw Materials 50,000 Direct Wages 10,000 Carriage Charges on purchase of raw materials 5,000 93



Factory Power

5,000

Depreciation on Factory Machines 5,000 Purchase of Finished Goods. 30,000 Cartage paid on Finished Goods purchased 2,000

5.8.3. Preparation of Profit and Loss Account Exercise: 4. From the following balance extracted at the close of the year ended 31 st Dec. 2007, prepare Profit and Loss account of Miss. Devi as at that date. Rs. Rs. Gross profit 55,000 Repairs 500 Carriage on sales 500 Telephone expenses 520 Office Rent 500 Interest Dr.. 480 General Expenses 900 Fire Insurance Premium 900 Discount to customers 360 Bad Debts 2,100 Interest from Bank 200 Apprentice Premium Cr.. 1,500 Traveling expenses 700 Printing & Stationery 2,500 Salaries 900 Trade expenses 300 Commission 300 Exercise:5. From the following balances, taken from the Trial Balance of Miss. Ilakkiya, prepare a Trading and Profit and Loss Account for the year ending 31 st Dec. 2007. Dr.Rs. Cr.Rs Stock on 01.01.2007 2,000 Purchases and Sales 20,000 30,000 Returns 2,000 1,000 Carriage 1,000 Carriage 1,000 Rent 1,000 Interest received 2,000 Salaries 2,000 General Expenses 1,000 Discount 500 Insurance 500 The Closing Stock on 31 st December, 2007 is Rs. 5,000. 5.8.4. Preparation of Balance Sheet Exercise: 6. Prepare Balance Sheet of Miss. Farzana as at 31 st December 2007. Rs Capital 10,00,000 Closing Stock 2,00,000 Fixed Assets 3,10,000 Sundry Debtors 10,00,000 Profit & Loss Account 2,10,000 Sundry Creditors 3,75,000 Liabilities for Expenses 55,000 Drawings 30,000 Cash and bank 1,00,000 5.8.5. Preparation of Final Accounts with single Adjustment Exercise:7. From the following balances extracted from the books of Miss Gomathi. Prepare a Trading and Profit and Loss Account and a Balance Sheet.

94



Particulars

Rs.

Particulars

Rs

Opening Stock 1,250 Plant and Machinery 6,230 Sales 11,800 Returns Outwards 1,380 Depreciation 667 Cash in hand 895 Commission Cr.. 211 Salaries 750 Insurance 380 Debtors 1,905 Carriage Inwards 300 Discount Dr.. 328 Furniture 670 Bills Receivable 2,730 Printing Charges 481 Wages 1,589 Carriage Outwards 200 Returns Inwards 1,659 Capital 9,228 Bank overdraft 4,000 Creditors 1,780 Purchases 8,679 Bills Payable 541 Petty Cash in hand 47 Bad Debts 180 The Value of Stock on 31 st December, 2007 was Rs. 3,700. 5.8.6. Preparation of Final Accounts with several Adjustments Exercise:8. From the following Trial Balance and additional information for Miss. Hema, you are required to prepare a Profit & Loss Accounts for the year ended 31 December 2007.

Particulars Dr. Rs. Cr. Rs. Capital 20,000 Sundry Debtors 5,400 Drawings 1,800 Machinery 7,000 Sundry Creditors 2,800 Wages 10,000 Purchases 19,000 Opening Stock 4,000 Bank Balance 3,000 Carriage Charges 300 Salaries 400 Rent and Taxes 900 Sales 29,000 51,800 51,800 Additional Information : Closing Stock Rs. 1,200. Outstanding Rent and Taxes Rs. 100. Charge depreciation on machinery at 10%. Wages prepaid Rs. 400. Exercise: 9. The following are the Balances extracted from the Books of Miss. Indhu as on December 31,2007.

Rs. Rs. Capital 2,00,000 Loan @9% 50,000 Drawings 35,000 Salaries 44,000 Buildings 1,00,000 Wages 75,000 Machinery 25,000 Rent 27,500 Furniture & fittings 6,000 Traveling expenses 12,500 Opening Stock 1,25,000 Postage telegrams 1,350 Cycle 4,000 Rates& taxes 900 Purchase 7,50,000 Carriage inwards 25,000 Sales 12,50,000 Carriage outwards 7,500 Sales returns 50,000 Interest paid 3,750 Duty paid on purchase 1,50,000 General charges 9,000 Sundry debtors 1,00,000 Carriage outwards 7,500 95



Sundry creditors

75,000

Interest paid

3,750

Reserve for Bad & doubtful debts 4,000 General charges 9,000 Reserve for Discount on Debtors 2,000 Bad debts 3,000 Cash in the bank 24,000 Cash in hand 2,500 Provide the following: outstanding Salary Rs.4,000; Rent Rs.2,500; Wages Rs.6,000 and Interest outstanding. Maintain the reserve for doubtful debts at 5% and reserve for Discount on Debtors at 2 ½ %. Provide depreciation for building 2 1/2 % Machinery 10% furniture 6% cycle 15%. Prepare final Accounts. Exercise:10. Prepare Trading and Profit and Loss a/c and Balance Sheet from the following particulars Miss. Jaya as on 31-12-2007 Particulars Dr Rs. Cr.Rs. Capital 10,000 Cash in hand 1,500 Bank O.D. @ 5% 2,000 Purchases and Sales 12,000 15,000 Returns 1,000 2,000 Establishment charges 2,500 Taxes Insurance 500 Bad debts reserve 1,000 Bad Debts 500 Sundry Debtors and creditors 5000 1,850 Commission 650 Investments 4,000 Stock as on 1 st Jan, 1996 3,000 Drawings 1,500 Furniture 500 Bills Receivable and Payable 3,000 2,500 Total 35,000 35,000 Adjustments: Salary Rs.100 and Taxes Rs.400 are outstanding but Insurance Commission amounting to Rs.100 has been received in advance. Interest accrued on investment Rs.210. Bad Debts Reserve is to be maintained at Rs.1,000. Depreciation on furniture is to be charged at 10%. Stock on 31 st Dec.1993 was valued at Rs.4,500. Exercise: 11. From the following Trial Balance of Miss. Kalaivani as at 31 st December 2007. Prepare Trading and Profit and Loss Account for the year ended 31 st Dec.2007 and a Balance Sheet as on that date. Particulars Dr. Rs. Cr Rs. Capital 80,000 Drawings 6,000 Machinery 25,000 Stock 1-1-07 15,000 Purchases 82,000 Returns inwards 2,000 Sundry Debtors 20,600 Furniture 5,000 Freight and Duty 2,000 Carriage outwards 500 Rent, Rates & Taxes 4,600 Printing and Stationery 800 96



Trade Expenses

400

Sundry Creditors 10,000 Sales 1,20,000 Return outwards 1,000 Postage and Telegram 800 Provision for doubtful Debts 400 Discount 800 Rent Received 1200 Insurance Charges 700 Salaries and wages 21,300 Cash in hand 6,200 Cash at bank 20,500 2,13,400 2,13,400 Adjustments: Stock on 31.12.2007 was valued at Rs.14,600. Write off Rs.600 as bad debts. Provision for doubtful debts to be made at 5% on debtors. Create a provision for discount on debtors and on creditors at 2%. Depreciate machinery by 20% and furniture by 5%. Insurance prepaid was Rs.100. Exercise: 12. The following balances of Miss. Lawanya as on 30 th June 2007. Capital 5,000 Loans Borrowed 25,000 Drawings 3,000 Sundry Debtors 10,000 Buildings 15,000 Deposits Dr. 1,000 Plant and Machinery 15,000 Purchases 2,20,000 Furniture and fittings 4,000 Opening stock 15,000 Lorry 10,000 Sales 3,00,000 Creditors for trade 5,000 Carriage inwards 2,000 Freight and duty on purchases 25,000 Insurance 500 Carriage outwards 1,000 Commission on sales 1,000 Salaries 6,000 Reserve for Bad debts 300 Wages 20,000 Reserve for discount on debtors 150 Lighting charges 1,000 Discount allowed to customers 1,500 Taxes and license 1,200 Cash on hand 150 Postage and telegrams 150 Over draft with bankers 24,750 General charges 700 Lorry maintenance 3,500 Interest paid 2,250 Adjustments:

(a) Stock on hand 30-6-2007 Rs.2000 (b) Provide the following

Salaries due Rs.600 Wages due Rs. 1,000 Interest due on Loans Rs.500 On overdraft Rs.250 Lorry maintenance due Rs.500 Insurance prepaid Rs.125.

(c) Maintain the reserve for Doubtful Debts at 5% and Reserve for discount at 5% and Reserve for discount 2 ½ % on debtors.

(d) Provide Depreciation on: Building 5%; Plant and Machinery 10%; lorry 25%. Prepare Trading and Profit and Loss account for the year ended 30 th June 2007 and Balance Sheet as on that date.

Exercise: 13. Miss. Malathi books show the following balances prepare his Trading and Profit and loss a/s for the year ended 31 st December 2007 and Balance Sheet as that date

97



Particulars

Rs

Particulars

Rs.

Drawings 5,000 Capital 1,08,850 Bills Receivable 4,500 Loan at 6% p.a. 20,000 Land and Building 37,770 Sales 3,50,000 Sundry Debtors 62,000 Interest on Investments 5,640 Wages and Salaries 40,970 Sundry Creditors 59,000 Returns inwards 2,780 Commission Received 630 Purchases 2,56,590 Returns outwards 6,430 Postage and telegrams 5,620 Stock at Commencement 89,680 Printing and Stationery 880 Traveling Expenses 12,000 Interest on loan paid 300 Petty Cash 70 Bank balance 8,800 Commission 470 Repairs 3,620 Furniture 500 Investments 19,000 5,50,550 5,50,550 Adjustments : The closing stock Rs.1,28,960 on 31-12-2007. Commission received but not earned Rs.130. Travelling Expenses were overdrawn by the employees to the extent of Rs.2000. Create at 5% Reserve for Doubtful Debts on sundry Debtors and 2% Reserve for discount on Debtors and Creditors. Interest on loan due for 9 months. One-fourth of wages and salaries should be charged to Trading Account. Exercise:14. The following are the balances extracted from the books of Miss. Nathiya as on 31-12-2007

Particulars Dr.Rs Cr Rs Capital 12,500 Drawings 6,200 Furniture and fittings 1,750 Typewriter 1,200 Purchases 1,80,000 Sales 2,35,000 Lorry 12,000 Travelling Expenses 900 Sundry Creditors 10,000 Insurance premium 500 Audit fees 600 Postage and telegrams 150 Bad Debts 500 Interest paid 250 Rent and Taxes 5,000 Return out wards 5,000 Return inwards 10,000 Carriage outwards 8,000 Salaries 11,000 Advertisement 1,200 Cycle 200 98



Opening stock

21,500

Sundry Debtors 12,000 Provision for Bad & Doubtful Debts 400 Commission earned 9000 Discount allowed 5000 Cash on hand 450 Bank Overdraft 6,500 2,78,400 2,78,400 Adjustments:

(a) Stock on 31-12-2007 Rs.17,500 (b) Provide the following Outstanding; Interest Rs.250; Salaries Rs.1,000; Rent Rs.500;

Audit fee Rs.500; (c) Prepaid Expenses: Insurance Premium Rs.125; Advertisement Rs.200 (d) Maintain Provision for Bad & Doubtful Debts at 5% on Debtors (e) Provide Depreciation Furniture and Fitting - @ 10% Cycle - @ 15% Typewriter - @ 15% Prepare Trading and Profit & Loss Account for the above period ended and a Balance Sheet as that date.

Exercise: 15. The following are the balances extracted from the books Miss. Oviya as on 31-12-2007 Prepare Final Accounts.

Particulars Rs. Particulars Rs Capital 20,000 Creditors 4,800 Buildings 15,000 Cash on Hand 300 Machinery 10,000 Cash at Bank 4,700 Furniture 1,000 Salaries 14,000 Motor Cycle 8,000 Rent paid 4,000 Purchases 94,000 Commission Cr. 1,400 Purchases returns 1,000 Rates & Taxes 600 Sales 1,40,000 Bad Debts 200 Sales Returns 500 Interest 400 Debtors 15,000 Dividend 500 Sundry Expenses 800 Discount allowed 700 Rent received 1,500 Provision for Bad Debts 300 Stock 1-1-2007 11,000 Bank Overdraft 10,700 Adjustments:

(a) Closing Stock valued at Rs.10,000 31-12-2007 (b) Salaries outstanding Rs.1,000 (c) Rent received in advance Rs.200 (d) Dividend accrued but not yet received Rs.150 (e) Provide depreciation on Machinery at 10% Buildings at 5% (f) Interest on Capital at 8% (g) Maintain provision for Bad Debts at 5% on Debtors. h. Provide 2% each for discount on and debtors on creditors

Exercise: 16. The following Trial balances extracted from the books of a Merchant Miss. Padmavathi on 31-12-2007 99



Particulars

Dr.Rs.

Cr. Rs.

Furniture & Fittings 640 Motor Vehicles 6,250 Buildings 7,500 Capital 12,500 Bad Debts 125 Bad & Doubtful Debts Provision 200 Sundry Debtors and Creditors 3,800 2,500 Stock 1-1-2007 3,460 Purchases and Sales 5,475 15,450 Bank overdraft 2,850 Sales and Purchases Returns 200 125 Advertising 450 Interest on Bank overdraft 118 Commission 375 Cash 650 Taxes and Insurance Premium 782 General Expenses 1,250 Salaries 3,300 34,000 34,000 Adjustments :

1) Stock on hand on 31.12.2007 Rs. 3,250 2) Depreciation Buildings @ 5% Furniture @ 10% Motor Vehicles @ 20% per

annum. 3) Rs. 85 is due for interest on Bank overdraft 4) Salaries Rs. 300 and Taxes Rs. 200 are outstanding 5) Insurance Premium amounting Rs. 100 Prepaid 6) One-third of the commission received is in respect of work to be done next year. 7) Write of a further sum of Rs. 100 as bad debts from Debtors and create provision

for Bad & Doubtful debts to be made @ 5% on debtors. Prepare a Trading and Profit & Loss Account and the Balance Sheet for the above year.

Exercise: 17. Prepare Trading, Profit & Loss A/c and Balance Sheet from the following Trial Balance of Miss. Queen.

Debit Balances Rs. Credit Balances Rs.

Sundry Debtors 92,000 Capital 70,000 Plant & Machinery 20,000 Purchase Returns 2,600 Interest 430 Sales 2,50,000 Rent, Rates, Taxes & Insurance 5,600 Sundry Creditors 60,000 Conveyance charges 1,320 Bank Overdraft 20,000 Wages 7,000 Sales Returns 5,400 Purchases 1,50,000 Opening stock 60,000 Drawings 22,000 Trade Expenses 1,350 Salaries 11,200 Advertising 840 Discount 600 100



Bad debts

800

Business Premises 12,000 Furniture & Fixtures 10,000 Cash in hand 2,060 4,02,600 4,02,600 Adjustments : i. Stock on hand on 31.12.2007 Rs. 90,000.

ii. Provide depreciation on premises at 2.5%; Plant & Machinery at 7.5% and Furniture & Fixtures at 10%.

(iii) Write off Rs. 800 as further bad debts. (iv) Provide for doubtful debts at 5% on sundry debtors. (v) Outstanding rent was Rs. 500 and outstanding wages Rs. 400. (vi) Prepaid insurance Rs. 300 and prepaid salaries Rs. 700.

Exercise: 18. From following Trial Balance extracted for the Books of Miss. Ramya, prepare Trading, Profit & Loss A/c and Balance Sheet for the year ended 31.12.2007.

Debit Balances Rs. Credit Balances Rs.

Cash at Bank 2,610 Creditors 4,700 Book Debts 11,070 Discounts 150 Salaries 4,950 Creditors for expenses 400 Carriage inwards 1,450 Returns outwards 2,520 Carriage outwards 1,590 Sales 80,410 Bad debts 1,310 Capital 40,000 Office expenses 5,100 Purchases 67,350 Returns inwards 1,590 Furniture & Fixtures 1,500 Stock 14,360 Insurance 3,300 Depreciation on property 1,200 Freehold Property 10,800 1,28,180 1,28,180 Adjustments :

i. Make provision for doubtful debts at 5% ii. Calculate discount on creditors @ 2% (iii) Office expenses include stationery purchased Rs. 800. (iv) Carriage inwards includes carriage paid on purchase of furniture Rs. 50. (v) Outstanding salaries Rs. 150. (vi) Prepaid insurance Rs. 300. (vii) Stock on hand Rs. 10,700

Exercise: 19. The following are the Ledger balances extracted from the books of Miss. Sathiya as on 31.12.2007. 101



Rs.

Rs.

Debit Balances : Drawings 3,000 Repairs 360 Goodwill 6,000 Printing & Stationery 110 Land & Buildings 12,000 Bad debts 640 Plant & Machinery 8,000 Advertisement 6,700 Loose tools 600 Bills receivable 1,600 Stock, Ist Jan. 2007 8,000 80,720 Purchases 10,200 Wages 4,000 Credit Balances : Carriage inwards 200 Sales 24,000 Carriage outwards 80 Provision for Bad debts 900 Coal, Gas & Coke 1,160 Provision for discount on debtors 342 Sales return 400 Loan at 6% 4,000 Furniture & Fixtures 240 Sundry creditors 8,000 General expenses 1,050 Purchase returns 500 Provision for Discount on Crs 320 Discount received 300 Interest loan 120 Commission received 400 Salaries 1,000 Bills payable 2,278 Rent, Rates & Taxes 560 Discount allowed 300 80,720 Cash at bank 5,000 Cash in hand 80 Sundry debtors 9,000 Adjustments : Closing stock on 31.12.2007 amounted to Rs. 15,654. Depreciate Plant & Machinery at 5% loose tools at 15% and furniture & Fixtures at 20%. Provide for Bad & Doubtful Debts at 5% and for discount on Debtors and Creditors at 2%. Outstanding : Wages Rs. 200; and Rent, Rates & Taxes Rs. 100. Write off one-third of advertisement. Interest on loan has been paid for six months only. A bill for Rs. 1,000 included in Bills Receivable has been dishonored. The Manager is entitled to a commission of 5% on net profits after changing such commission. Prepare final accounts for the year ended 31.12.2007. Exercise: 20. From the following figures extracted from the books of Miss. Thenmozhi you are required to prepare a Trading and Profit & Loss Account for the year ended 31 st March, 2007 and a Balance Sheet as on that date after making the necessary adjustments.

Particulars Rs. Particulars Rs. Capital 2,28,800 Stock 01.04.1989 38,500 Drawings 13,200 Wages 35,200 Plant and Machinery 99,000 Sundry Creditors 41,000 Freehold property 66,000 Postage and Telegrams 1,540 Purchases 1,10,000 Insurance 1,760 Returns Outwards 1,100 Gas and Fuel 2,970 Salaries 13,200 Bad Debts 660 Office Expenses 2,750 Office Rent 2,360 Office Furniture 5,500 Freight 9,900 Discounts A/cDr.. 1,320 Loose Tools 2,200 Sundry Debtors 29,260 Factory Lighting 1,100 Loan to Krishna @ Provision for D/D 880 102



10% p.a.-balance on 01.04.2006

44,000

Interest on Loan to Shri Krihsna

1,100

Cash at Bank 29,260 Cash on hand 2,640 Bills Payable 5,500 Sales 2,31,440 Adjustments :

1. Stock on 31 st March 2007 was valued at Rs.72,600. 2. A New machine was installed during the year costing Rs. 15,400, but it was not

recorded in the books as no payment was made for it. Wages Rs. 1,100 paid for its erection has been debited to wages account.

3. Depreciate : Plant and Machinery by 33 1/3 %. Furniture by 10% Freehold Property by 5%

4. Loose tools were valued at Rs. 1,760 on 31.03.2007. 5. Of the Sundry Debtors Rs. 600 are bad and should be written off. 6. Maintain a provision of 5% on Sundry Debtors for doubtful debts. 7. The Manager is entitled to a commission of 10% of the net profits after charging

such commission.

5.9. Model Answers to Check your Progress : Ex:1. G.P. : 14,40,000 – 3,60,000 = 11,24,000 + 1,00,000= 12,24,000- 80,000 + 8,50,000 + 52, 000 + 24,000 + 30,000. 1,88,000 Ex:2. Cost of Goods Manufactured : 3,000 + 50,000 + 32,000 + 1,000 + 40,000 + 3,000. – 4,000. = 1,24,000 Ex:3. Cost of Goods Manufactured : 5,000 + 55,000 + 10,000 + 5,000 + 5,000 + 5,000. – 15,000. = 70,000 Ex:4. N.P : 55,000+200+1500. – 500+500+900+360+700+900+300+500+520+480+ 900+2100+2500+300. = 45,240

Ex:5. G.P : 28,000 + 5,000. – 2,000 + 19,000 + 1,000+1,000. = 10,000 N.P : 10,000 + 2,000 + 500. – 1,000+2,000+1,000+1,000+500. = 8,000 Ex :6. Liabilities: 10,00,000 + 2,10,000. – 30,000. + 3,75,000 + 55,000 16,10,000 Assets : 3,10,000 + 2,00,000 + 10,00,000 + 1,00,000 16,10,000 Ex:7. G.L : 29,000+2,700. – 4,000 + 17,800+9,600+300. = 2,700 N.L : 2,700. + 400+1,000+700. = 4,800 Liabilities: 100 + 2,800+20,000 – 4,800 – 1,800 = 16,300 Assets : 3,000+5,400+1,200+400+6,300 = 16,300

103 Ex:8. G.P : 1,20,000 + 14,000. – 12,000 + 90,000+7,500+600. = 20,900



N.P : 20,900.–4,400+400+2,750+250+1,250+135+90+750+900+375+75+250 +36+60+500+300-400+238-200. = 8,490.

Liabilities: 20,000+8,492+3,500 =24,992 + 7,500+5,000+75+400+250+600 = 38,816 Assets : 9,750+2,250+564+340+14,000+9,263+2,400+250 = 38,816.

Ex:9. G.P : 14,000+4,500. – 3,000+10,000. = 5,500 N.P : 5,500+550+210+1,000. – 2,500+850+500+100+50+1,000. = 2,260 Liabilities: 10,000 – 1,500+2,260+2,000+2,500+1,850+100+400+100 = 17,710 Assets :1,500+4,000+3,000+4,210+450+50+4,500 = 17,710 Ex:10. G.P : 1,18,000 + 14,600. – 15,000+81,000+2,000. = 34,600 N.P : 34,600+1,200+200+800.–500+4,600+800+400+800+1,200+600 +21,300+380+5,250. = 970 Liabilities: 80,000+970 - 6,000 = 74,990 + 9,800 = 84,770 Assets : 20,000+4,750+14,600+18,620+20,500+6,200+100 = 84,770

Ex:11. G.P : 3,00,000+20,000. – 15,000+2,20,000+25,000+21,000+2,000. = 37,000 N.P : 37,000.-7,200+2,750+4,000+375+1,000+1,000+1,200+150+750+1,000 +1,500+200+88+5,150. = 10,380 Liabilities: 5,000+10,386-3,600=11,786+600+1,000+500+5,000+25,500+25,500 = 69,386 Assets :150+1,000+926+20,000+7,500+3,600+13,500+14,250+125 = 69,386 Ex:12. G.P: 3,47,220+1,28,960. – 89,680+2,50,160+10,243. = 1,26,096 N.P: 1,26,096+5,640+500+1,180.–30,726+5,620+880+10,000+1,200+470 +3, 620+3,100+ 1,178. = 66,272 Liabilities: 1,08,850+76,622-50,000 = 1,35,472 + 130+900+57,820+20,000 = 2,59,322 Assets : 70+8,800+19,000+4,500+57,722+1128,960+2,000+37,770+500 = 2,59,322 Ex:13. G.P : 2,25,000+17,500. – 21,500+1,75,000+12,000. = 34,000 N.P : 34,000+9,000.–900+375+1,100+150+700+500+5,500 +8,000+12,000+1,000+ 5,000+175+30+180. = 7,390. Liabilities: 12,500+7,390-6,200 = 13,690+10,000+6,500+2,250 = 32,440 Assets : 1,575+1,020+170+11,400+450+17,500+325 = 32,440 Ex:14. G.P : 1,39,500+10,000. – 11,000+93,000. = 45,500 N.P : 45,500+1,300+1,400+650+96.–800+15,000+4,000+600 +650+400+1,000+750+1,600+985. = 23,161 Liabilities: 20,000+23,161+1,600 = 44,761+4,704+10,700+1,000+200 = 61,365 Assets : 14,250+9,000+10,000+150 = 61,365

104 Ex:15. G.P : 15,250+3,250.- 3460+5350. = 9,690



N.P : 9,690 + 250. – 210+450+203+1,250+3,600+882+375+64+1250. = 1,656 Liabilities : 12,500+1,656=14,156+2,500+2,850+300+200+85+125= 20,216 Assets : 576+5,000+7,125+3,515+650+325+100= 20,216 Ex:16. G.P : 2,44 ,600+90,000. –60,000+14,7400 +7400.= 1,19,800 N.P : 1,19,800.-1350+10500+1320+840+5800+600+430+6160+800.= 90,000 Liabilities: 70,000-22,000+90,000=1,38,000+60,000+20,000+900= 2,18,900 Assets : 86,640+2,060+90,000+1,000+18,500+1,17,00+9,000= 2,18,900 Ex:17. G.P : 7,88,200+10,500.-14,360+64,830+1,400.= 8,730 N.L : 8,730+150+94. –5,100+3,000+4,300+1,863+1,590+600+1,200.= 8,679 Liabilities: 40,000+8,679=31,321+550+4,606= 36,477 Assets : 2,610+10,517+200+300+1,550+10,800= 36,477 Ex:18. G.P : 23,600+15,654. – 8,000+9,700+200+4,200+1,160. = 15,994 N.P : 15,994+400+140.–80+1,000+660+360+110+700+1,050+240+240+ 148+2,000+400+90+48+448. = 8,960 Liabilities : 40,000-3,000+8,960+748+2,278+4,120+7,840 = 60,946 Assets : 80+5,000+600+9,310+15,654+510+192 +7,600+12,000+4,000+6,000.= 60,946. Ex:19. G.P : 2,47,750+30,500.–34,200+1,00,260+1,860+34,500+9,500+1,280+950. = 95,700 N.P : 95,700.+15,850+2,140+4,250+8,200+1,400+400+2,000 +500+1,000+1910+957+. = 57,093 Liabilities: 80,000+57,093 = 1,37,093+957+15,000+44,560 = 1,97,610 Assets : 1,120+4,200+30,500+18,000+9,500+11,000+74,290+24,000+25,000 1,97,610 Ex:20. G.P : 2,31,440+72,600.–38,500+1,08,900+34,100+2,970+9,900+1,100. = 1,08,570 N.P : 1,08,570+4,400.–13,200+2,750+1,540+1,760+2,860+1,320+1,870 +42,790+4,080. = 40,800 Liabilities: 2,28,800+40,800-13,400 = 2,56,400+5,500+59,400+4,080 = 3,25,380 Assets : 77,000+62,700+4,950+1,760+72,600+27,170+47,300+29,460+2,640 3,25,380 5.10 References : Financial Accounting – R.L. Gupta – Sultan chand & Sons Advanced Accounting – S.N. Mageswari – Vikas Publishers

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104 A

LESSON 6

BILLS OF EXCHANGE

Contents : 6.0. Aims and Objectives 6.1. Introduction 6.2. Bills of Exchange 6.3. Other Negotiable Instruments 6.4. Journal Entries in the Books of Drawer and Drawee 6.5. Illustrations 6.6. Let Us Sum Up 6.7. Lesson End Activities 6.8. Model Answers to Check your Progress 6.9 References 6.0. Aims and Objectives : In this lesson we are going to discuss

· meaning, characteristics, and elements of bills of exchange

· meaning of promissory note and cheque

· distinction between bills of exchange and promissory note

· distinction between bills of exchange and cheque

· journal entries in the books of drawer

· journal entries in the books of drawee.





105

6.1. Introduction : Business transactions are, as we saw earlier, either cash transactions or credit transactions. When a person buys goods, on credit, for a smaller amount, the seller relies on him for the recovery of the debt dues from the buyer. and no security evidence is necessary because of the small transactions. But, at the same time, when the amount involved in the transaction is large, the seller needs security and evidence over the dealings. Here, the bill of exchange solves the problems of the seller more over, when one wanted to increase the business transactions, credits may be allowed and are paid after some time. In search cases, it becomes necessary that the dealings been reduced in writing so that there is no possibility of misunderstanding between the seller and the buyer, besides, the amount may be paid punctually as agreed upon. Thus, commercial practices have developed this written promise into the valuable instruments of credit. If they are in proper form, the buyer and the seller, who concluded a credit transaction, are in sound position. Even this written promise can be passed on from person to person-bills of exchange and promissory notes. However, this instrument comes under the negotiable Instruments. Negotiable Instruments are divided into three main classes-bills of exchange, promissory note, and cheque. Our purview is focused on bills of exchange and promissory notes. 6.2. Bills of Exchange : According the to the Indian negotiable instruments Act of 1881, under section 5, “A bill of exchange is an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of, a certain person or to the bearer of the instrument”. 6.2.1. Meaning : A bill of exchange is a written acknowledgement of debt, given by the debtor to his creditor for the sum due and the time of payment as well as the date and place of payment being set down. A bill of exchange has been defined as an “Instrument in writing containing an unconditional order signed by the maker directing a certain person to pay a certain sum of money only to or to the order of a certain person are to the bearer of the instrument”. When such as order is accepted by writing on the face of the order itself, it becomes a valid bill of exchange. For example, suppose Ram orders Shyam to pay rupees 50,000 three months after date and Shyam accepts this order by the putting his signature and name on it, then it will be a bill of exchange. 6.2.2. Specimen :

Specimen of a Bill of Exchange Rs. 4,000 Saraswathi, Coimbatore 1st January 2007

Stamp Three months after date, pay to me or my order the sum of Rupees Four Thousand Only, for value received. Ramu To Miss. Durga Cuddalore Durga : Debtor/Acceptor/Drawee Saraswathi : Creditor/Maker/Drawer/Payee

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6.2.3. Characteristics : a. A bill of exchange must be in writing. b. It must be dated and stamped. c. It must be signed by the maker or drawer. d. The name of the drawer must be clearly mentioned. e. The order must be an unconditional one. f. It must contain an order to pay money and not goods. g. The sum payable must be specified. h. The Money must be payable to a definite person or to his order are to the bearer. i. The amount should be paid within a stipulated time. j. It must have adequate stamp duty and the prescribed rate.

6.2.4. Elements : i. Date : Whenever a bill is drawn, it is usual for the drawer to specify the date of the bill, on the top right – hand corner. The date is important for the purpose of calculation of the due date of the billing. In the above specimen bill. In the above specimen bill, the due date of the bill is calculated by adding, to the date of the bill, the period of the bill. It is a general principle due to the drawee three days of grace extra days. over and above the period of the bill. Thus, the due date of the specimen bill given above. is 1st August plus three months plus three days, i.e., 4th November 2004. Due date is the date of payment. It is also known as the date of maturity. ii. Parties : There are three parties to a bill of exchange. a. Drawer: The person who draws or writes the bill is called Drawer, who is also called the Maker, Maker is the creditor. The creditor or Maker of the bill receives the amount, mentioned in the bill, on the due date. b. Drawee: Drawee is the person on whom the bill is drawn. Drawee is a debtor. He is the person who is ordered by the Drawer to pay the amount. When the bill is accepted by the drawee, he becomes the Acceptor. That is, when the drawee gives his consent by writing the word “Accepted” duly signed on the bill, the drawee becomes as Acceptor. c. Payee: The person, who has the right to receive the amount of the bill, is called payee. The payee may be third person or the Drawer himself. When the drawer has made the bill payable to him self, the drawer is the payee. In such case, the number of parties is reduced to two. In some cases, the drawer may make the bill payable to a third party, then the drawer and the payee will be different persons. iii. Term : It is the period after which sum mentioned in the bill is to be paid. In the specimen given above, the term of the bill is three months. The term is agreed upon by the parties. iv. Amount : The sum payable is specified both in figures and words. This is done with a view to minimize the possibility of alteration. v. Stamp : The stamp is affixed on every bill of exchange, except bill payable on demand. The value of stamp depends on the amount of the bill. Usually the stamp is affixed on the top left-hand corner of the bill. vi. Acceptance : A bill requires “Acceptance” by the drawee. But, a bill drawn and payable at sight or on demand does not require acceptance. Acceptance is the assent by the drawee to the order of the drawer. Unless the drawee gives his acceptance by writing the word “Accepted” and also putting his signature along with date, the bill does not become a legal document. After the acceptance the bill is returned to the drawer. Before the acceptance the bill is called a Draft and after the acceptance, it is termed an Acceptance The effect of an acceptance is to bind the drawee to honour the bill on the due date. The acceptance may be General Acceptance or Qualified Acceptance. A general acceptance is an unconditional

107



assent to the order of the drawer. It means there the drawee accepts the contents of the bill without any change. When the drawee makes materials alterations in the wordings of the bill, and then accepts it, it is a qualified acceptance. vii. Endorsement : An endorsement is the process by which a bill is transferred from one person to another. He may use the bill to settle his debt with another person. The endorsement is done by signing by the holder, on the face or back of the bill and thus transfers the right to someone else. The person who makes the endorsement is called the “Endorser”. The person to whom the bill is transferred is known as the “Endorsee”. viii. Retiring a Bill : Retiring a bill means honouring it before its due date. The drawee, who does so, is allowed a rebate. It is an allowance for early payment. When ever the payment of an amount which is less then the face value of the bill is made, before the due date by the acceptor and accepted by the drawer, it is known as retirement of a bill under rebate. ix. Holder : According to section 8 of the Negotiable Instruments Act, a holder is “any person entitled in his own name to the possession thereof and to receive are recover the amount due there on from the parties thereto”. That is, the person who is legally entitled to receive the money due on the instrument is called the holder. x. Holder in Due Course : According to section 9 of the Negotiable Instruments Act, “the holder in due course is a particular kind of holder”. The holder of a negotiable instrument is called the holder in due course, if he satisfies we following conditions : a. He obtained the instrument for valuable considerations: b. He becomes holder of the instrument before its maturity: c. He had no cause to believe that any defect existed in the title of the person from whom derived his title. xi. Renewal of a bill : When the acceptor finds it difficult to meet his acceptance on the due date, he approaches the drawer and requires him for an extension of time. If the drawer agrees to his request, the old bill is cancelled and a fresh bill is drawn for the amount stated in the old bill plus interest for the extended period. The process is referred as Renewal of Bill. xii. Dishonour of bill : On maturity if the Bill is not paid by the Acceptor, it is said to be dishonoured. A Bill may be dishonoured either by non-acceptance or by non-payment. Dishonour makes the drawer and endorsers liable to compensate the subsequent parties. Each endorsee may look to his transferor for payment. xiii. Notice of Dishonour : When a Bill is dishonoured, the holder of the Bill must give notice of dishonour to the drawer and each endorser. Failure to do so will discharge them from their obligations. The notice must be given within a reasonable time to warn the parties of their obligations. xiv. Noting and Protesting : After acceptance of the bill, the Acceptor becomes liable to any the amount to the Payee on maturity. If the payment is duly made, the Bill is said to be honoured or discharged. If the Acceptor fails to pay off, the Bill is dishonoured by non-payment. On the Bill being dishonoured by the Acceptor, the holder hands it over to a Notary Public. Notary Public is a Public Officer authorized to certify deeds and other documents. He represents the bill, again, to the Drawee and notes down the particulars of dishonour in his register. This process is known as Noting a Bill. Then, the Notary Public issues a note of the dishonour of the bill and it is an authentic proof, which is attached to the bill. This record of dishonour is called protest. The charges payable for the services of the Notary Public is called Noting charges. The holder of a Bill of Exchange is said to be the holder in due course. The holder of the Bill can hold the Bill till its due date to realize the amount, or if he is in need of cash before maturity, he may discount it with his banker or he may endorse it over to anyone in settlement of his debt. A Bill can be endorsed any number of times, till the due date.

108



xv. Insolvency : It is common that a few of the accepts become bankrupt before their acceptances mature. These acceptances then be treated as dishonoured by the holder or drawer by the holder or drawer and the relevant entries record. On the adjustment of a person as insolvent, his estate vests with the Officer Receiver who realizes the bankrupt’s properties and proportionately pays the creditors out of the realized sum. The payment by the Official Receiver to the insolvent’s creditors is called ‘Dividend’. Generally, the dividend is expressed as so many paise in the rupee. The dividend is usually below 100 paise a rupee. Hence, the entire claim is rarely discharged. In order to close off the personal accounts, the unsatisfied balance is debited to Bad Debts Account in the creditor’s book. 6.2.5. Kinds of Bills : There are two types of Bills : i. Inland Bill : An inland bill is drawn and payable in the same country. The specimen given above is an example of inland bill. The due date is counted from the given in the bill. ii. Foreign Bill : Foreign bill is drawn in one country, but payable in another country. A foreign bill is always drawn in a set of three, each of which is called “VIA”. The drawee has to accept and make payment of only one Bill. After the acceptance of one bill, the other two sets become inoperative. The due date of the foreign bill is to be counted from the date, when it is seen and accepted by the drawee. 6.2.6. Advantages of Bills : The following are the main advantages : i. It is facilitates movement of capital, because it is an instrument of credit. ii. It is a valid evidence of debt. It is a full proof of indebtedness. iii. Since the date of payment is fixed, debtor knows when he has to pay and the creditor knows when to expect his money. iv. The creditor can allow credit and at the same time capital is not locked up. v. Since it is a negotiable instrument, it can easily be transferred in settlement. vi. It is easy and convenient for remitting money from one place to another place. vii. Free transfer facility of bills enhances commercial transactions. viii. If the Drawer is in need of money, the Bill can be converted into cash, by discounting it with a bank, at a very normal expense. 6.2.7. Accommodation Bills : As stated above, Bills are accepted and endorsed for the benefit received. Generally, an acceptance is made to settle a trade debt, which is due to the Drawer by the drawee and such a Bill is called Trade Bill. Moreover, in such a Bill, we come across the words “for value received”. This means, Bills are accepted and endorsed for value benefit. received. Thus, it is clear that Bill of Exchange is usually used in the businesses for discharging of mutual indebtedness arising from genuine trading activities. As contrasted with the Trade Bill, Accommodation Bills are drawn and accepted with no consideration passed or received. The Bill, which is drawn just to oblige a friend, who is in need of money, of course without any trading activities, with sole intention of raising funds required for ready cash is known as Accommodation party, i.e., the drawee accepts the Bill drawn by the accommodated party drawer.. That is the Drawer of the accommodation bill can be called accommodated party and drawee can be called accommodating party. After the Bill is accepted, the drawer discounts it with a bank obtains the cash. Before the due date of the Bills, Drawer provides funds to the Acceptor, who honours the Bill. Since the acceptance is given without consideration and to help the accommodated party to raise the funds, the accommodated party has to discharge the Bill by himself or provide funds to accommodating party. Thus, there is a always a mutual understanding between the parties and hence, these bills are called Accommodation Bills. The language of an Accommodation Bill is the same as that of an ordinary Trade Bill. The mode of drawing, accepting, discounting, honouring etc. are similar to that of any Trade Bills. A banker cannot make distinction between a genuine Trade Bill and Accommodation bill. These Bills are also called “kites” or “Finance Bills”.



109 6.3. Other Negotiable Instruments : 6.3.1. Promissory Note : “A Promissory Note is an instrument in writing not being a bank note or currency note. containing an unconditional undertaking, signed by the maker, to pay a certain sum of money only to, or to the order of, a certain person, or to the bearer of the instrument.” [Sec.4] Essential of a Promissory Note : In order to be a valid one, a promissory note must have the following:

a. The instrument must be in writing. b. The instrument must be signed by its maker. c. The instrument must contain a promise to pay. d. The promise to pay must be conditional. e. The maker of the instrument must be certain and define. f. It must be stamped. g. The sum of money to be paid must be certain. h. The Payment must be in legal tender money of India. i. The money must be payable to a definite person or according to his order. j. The Promissory note must be payable on demand or after a certain definite period of time.

6.3.2. Cheque : “A cheque is a Bill of Exchange drawn on a specified banker and not expressed to be payable otherwise than on demand.” The essential features of a cheque are : a. A cheque must have to fulfill all the essential elements of a Bill of Exchange. b. It must be payable to the bearer or to order, but in either case, it must be payable on demand. c. The banker, named, pay it when it is presented for payment. d. The signature must tally with the specimen signature of the drawee in the Bank. e. A cheque must be dated. f. A cheque drawn with a future date is valid, but the same is payable on and after such specified date. 6.3.3. Difference Between Bills of Exchange and Promissory Note :

Bill of Exchange Promissory Note a.. It is drawn by the creditor a. It is drawn by the debtor. b.. It has three parties, i.e. the drawer, drawee and payee.

b. It has two parties, i.e. the maker and the payee.

c.. It contains an order to pay. c. . It is contains a promise to pay. d.. It is used in settlement of trade debts. d.. It is used to borrow money. e.. Drawer is a creditor. e.. Drawer is a debtor. f.. It needs acceptance by the drawee. f.. It does not need acceptance. g.. Drawee or acceptor is primarily liable. g.. Maker debtor. is primarily liable to honour his

promises. h.. Demand bill of exchange does not require stamp. h.. Both demand and time promissory note require

stamp duty. i.. Foreign bills are drawn in sets and inland bill is drawn one copy.

i.. Only one copy is prepared whether it is foreign or inland

j.. It is widely circulated in business. j.. Not so common in circulation.

6.3.4. Difference Between Bills of Exchange and Cheque: Cheque Bill of Exchange

a.. A Cheque is always drawn on a printed form. a.. A bill need not be drawn on a printed form. b.. A cheque does not requires any acceptance. b.. A bill of exchange requires acceptance. c.. A cheque is always supposed to be drawn against the funds in the hands of a banker.

c.. There is no such supposition.

d.. A cheque is always payable on demand. d.. Acceptor is allowed 3 days of grace after the date of maturity.

e.. A cheque is free from stamp duty. e.. A bill of exchange must be stamped .



f.. A cheque may be crossed to ensure safety.

110 f.. It cannot be crossed.

g.. A cheque may be countermanded. g.. The payment of a bill cannot be countermanded. h.. Notice of dishonour is not necessary. h.. Notice of dishonour is necessary. i.. It is not protested or noted on dishonour. i.. It is usually protested and noted for dishonour.

(6.4) Journal Entries in the books of Drawer and Drawee :

In the Books of Drawer In the Books of Drawee 1. When a Bill Receivable is received. Debit : Bills Receivable Account Credit : Personal Account of the Drawee.

1. When a Bill is accepted. Debit : Personal Account of the Drawer Credit : Bills Payable Account.

2. When Bills Receivable is honoured Debit : Cash Account Credit : Bills Receivable Account.

2. When a Bill payable is duly honoured. Debit : Bills Payable Account. Credit : Cash Account.

3. When Bills Receivable is discounted. Debit : Cash Account. Credit : Bills Receivable Account.

---

4. When a Bill is endorsed Debit : Receiver A/c. Credit : Bills Receivable A/c.

--

5. When a bill is retired. Debit : Cash A/c Debit : Rebate A/c. Credit : Bills Receivable A/c.

5. When a bill is retired. Debit : Bills Payable A/c. Credit : Cash A/c. Credit : Rebate A/c.

6. When a bill is dishonoured Debit : Acceptor A/c Credit : Bills Receivable A/c.

6. When a bill is dishonoured Debit : Bills Payable A/c. Credit : Drawer A/c.

7. When a bill is sent for collection Debit : Bank A/c. Credit : Bills Receivable A/c.

---

8. When a bill is renewed a. Debit : Acceptor A/c Credit : Bills Receivable A/c Being cancellation of old bill.

8. When a bills payable is renewed. a. Debit : Bills Payable A/c Credit : Drawer A/c Being cancellation of old bill.

b. Debit : Acceptor A/c Credit : Interest A/c Being the amount of interest.

b. Debit : Interest A/c Credit : Drawer A/c Being the amount of interest.

c. Debit : Bills Receivable A/c Credit : Acceptor A/c Being drawal of new bill.

c. Debit : Drawer A/c Credit : Bills Payable A/c Being drawal of new bill.

9. When a bill is noted. Debit : Acceptor A/c. Credit : Cash A/c. Credit : Bills Receivable A/c.

9. When a bill is noted. Debit : Bills payable A/c. Debit : Noting charges A/c. Credit : Drawer A/c



111

6.5. ILLUSTRATIONS 6.5.1. Discharge of Bills Illustration 1: On March 10 th, A sold goods to B a Bill at three months for Rs. 800, which B accepts immediately and returns it to A. The Bill is honoured on the due date. Pass entries in the books of both A and B. Solution :

In the books of A In the books of B March 10

B Account Dr. To Sales A/c Being credit sales made to B.

Rs. 800

Rs. 800

Purchase Account Dr. To A Account Being credit purchase.

Rs. 800

Rs. 800

March 10 Bills Receivable Account Dr. To B Account Being acceptance received.

800 800

A Account Dr. To Bills Payable A/c Being acceptance given.

800 800

June 13 Cash Account Dr. To Bills Receivable A/c Being amount received.

800 800

Bills Payable Account Dr. To Cash Account Being acceptance met.

800 800

6.5.2. Discounting the Bill : Illustration : 2. A accepted a four month’s draft for Rs. 1,000 drawn on him by B on 15 th April. The Bill was discounted with the bankers on the next day at 12%. On maturity the Bill was met. Make journal entries in the books of A and B. Solution :

In the books of A In the books of B April 15

B Account Dr. To Bills Payable A/c Being acceptance given.

Rs. 1,000

Rs. 1,000

Bills Receivable A/c Dr. To A Account Being acceptance given.

Rs. 1,000

Rs.

1,000

April 16

--

Bank Account Dr. Discount Account Dr. To Bills Receivable A/c Being the Bill Discounted.

960 40

1,000

Aug. 18 Bills Payable A/c Dr. To Bank Account Being acceptance met.

1,000 1,000 --

6.5.3. Endorsing the Bill Illustration: 3.On 1 st June Ram drew a bill upon Krishna for Rs. 500 at four months date. This was duly accepted and payable at Canara Bank. After the acceptance, the bill was endorsed to Gopal. On the due date, the Bill was honoured. Pass the journal entries in the books of all parties. Solution :

In the books of Ram

June 1 Bills Receivable Account Dr. To Krishna Account Being acceptance received.

Rs. 500

Rs.

500



112

June 1 Capital Account Dr. To Bills Receivable Account being Krishna’s acceptance endorsed to Gopal.

500

500

In the books of Krishna

June 1

Ram Account Dr. To Bills Payable Account Being acceptance given.

Rs. 500

Rs.

500

Oct. 4 Bills Payable Account Dr. To Cash Account Being acceptance met.

500 500

In the books of Gopal

June 1

Bills Receivable Account Dr. To Ram Account Being Krishna’s acceptance endorsed.

Rs. 500

Rs.

500

Oct. 4 Cash Account Dr. To Bills Received Account Being Cash Received.

500 500

6.5.4. Bills Sent for Collection : Illustration :4. A four months Bill for Rs. 500 was returned duly accepted by Natesh on 1 st February, to the drawer, Mahesh, who sent it to his banker for collection. On maturity, the banker informed Mahesh that the Bill was honoured. Pass journal entries in both the books. Solution :

In the books of Mahesh In the books of Natesh Feb. 1

Bills Receivable Dr. To Natesh’s A/c Being acceptance received.

Rs. 500

Rs. 500

Mahesh Account Dr. To Bills Payable A/c Being acceptance given.

Rs. 500

Rs. 500

Feb. 1 Bills Sent for Collection A/c Dr. To Bills Receivable A/c Bill sent to bank for collection.

---

June 4 Bank Account Dr. To Bills sent for Collection A/c Cash received on the honour of the bill

500 500

Bill Payable Account Dr. To cash Account Being acceptance met.

500 500

6.5.5. Dishonour of Bills a. When bill is in the hands of drawer Illustration : 5. Mr. Ravi draws a Bill for Rs. 2,000 on Gopal on 15 th September for three months. On maturity, Gopal failed to honour the Bill. Pass the necessary journal entries in the books of Ravi and Gopal, if he had retained the Bill with him till maturity.



113 Solution :

In the books of Ravi In the books of Gopal Sep. 15

Bills Receivable A/c Dr. To Gopal A/c Being acceptance received.

Rs. 2,000

Rs. 2,000

Ravi’s Account Dr. To Bills Payable A/c Being acceptance given.

Rs. 2,000

Rs.

2,000

Dec.18 Gopal Account Dr. To Bills Receivable A/c Being Bill dishonoured at maturity.

2,000 2,000

Bill Payable A/c Dr. To Ravi A/c Being Bill dishonoured at maturity.

2,000 2,000

b. When the bill is in the hands of banker Illustration : 6. On 15 th June, Niranjan sold goods to Prema, valued at Rs. 2,000. He drew a Bill at 3 months for the amount and discounted the same with his bankers at Rs. 1,960. On the due date, the Bill was dishonoured and Niranjan paid the bank the amount due plus the noting charges of Rs. 10. Pass the journal entries in the books of the two parties. Solution :

In the books of Niranjan In the books of Prema June15

Prema Account Dr. To Sales Account Being goods sold on credit.

Rs. 2,000

Rs. 2,000

Purchases Account Dr. To Niranjan Account Being goods Purchases on credit.

Rs. 2,000

Rs.

2,000

June15 Bills Receivable Account Dr. To Prema Account Being acceptance received.

2,000 2,000

Niranjan Account Dr. To Bills Payable A/c Being acceptance given.

2,000 2,000

June15 Bank Account Dr. Discount Account Dr. To Bills Receivable A/c Being the bill discounted.

1,960 40

2,000 ---

Sept.18 Prema Account Dr. To Bank Account Being the amount of the bill plus Noting charges of Rs.10 Paid.

2,010 2,010

Bills Payable A/c Dr. Noting Charges A/c Dr. To Niranjan A/c Being the amount of the Bills plus Noting Charges.

2,000 10

2,010

C. When the bill is under the endorsement Illustration :7. On 1 st January, A drew a Bill on B for Rs. 1,000 payable after three months. B accepted the Bill and returned it to A. After 10 days A endorsed the Bill to his Creditor C. On the due date, the Bill was dishonoured and C paid Rs. 5 as noting charges. Record the transactions in the journals of A, B and C. Solution :

In the books of A Jan. 1

Bills Receivable Account Dr. To B Account Being acceptance received.

Rs. 1,000

Rs.

1,000

Jan. 10 C Account Dr. To Bills Receivable A/c Being the acceptance endorsed to C.

1,000 1,000



April 4

B Account Dr. To C Account Being dishonour of Bills and Noting charges paid by C.

1,005

114

1,005

In the books of B

Jan. 1

A Account Dr. To Bills Payable Account Being acceptance given.

Rs. 1,000

Rs.

1,000

April 4 Bills Payable Account Dr. Noting Charges Account Dr. To A Account Being the bill dishonoured and noting charges paid.

1,000 5

1,005

In the books of C Jan. 10

Bills Receivable Account Dr. To A Account Being B’s acceptance endorsed by A.

Rs. 1,000

Rs.

1,000

April 4 A Account Dr. To Bills Receivable A/c To Cash Account Being the dishonour of the bill and paid Noting charges.

1,005 1,000

5

d. When the bill is sent for collection Illustration :8. On Ist January, A drew a Bill on B for Rs. 1,000, payable after three months. Immediately after its acceptance, A sent the Bill to his Bank for collection. On the due date, the Bill was dishonoured. Record the transactions in the journals of A and B. Solution :

In the books of A In the books of B Jan. 1

Bills Receivable A/c Dr. To B A/c Being acceptance received.

Rs. 1,000

Rs. 1,000

A Account Dr. To Bills Payable A/c Being acceptance received.

Rs. 1,000

Rs. 1,000

Jan. 1 Bills Sent for collection A/c Dr. To Bills Receivable A/c Being Bill sent to bank for collection.

1,000 1,000

--

April4 B Account Dr. To Bill sent for collection A/c Being Bill dishonoured.

1,000 1,000

Bills Payable A/c Dr. To A Account Being acceptance dishonoured.

1,000 1,000

6.5.6. Renewal of the Bills Illustration :9. On Ist May, Azhagu sold goods to Anbu for Rs. 500 and drew upon him a Bill at three months for the amount. Anbu accepted the draft and returned to Azhagu on the due date Anbu expressed their inability to meet the Bill and offered Rs. 300 in cash and to accept a new Bill for the balance plus interest at 12% p.a. for three months. Azhagu agreed to



115 the proposal. On maturity, the Bill was duly met by Anbu. Pass entries in the books of the parties to record the above transactions. Solution :

In the books of Mr. Azhagu

May 1

Anbu Account Dr. To Sales Account Being acceptance given.

Rs. 500

Rs.

500

May1 Bills Receivable Account Dr 500 To Anbu Account 500 Being acceptance received. Aug 4 Anbu Account Dr 500 To Bills Receivable Account 500 Being cancellation of old Bill. Aug 4 Cash Account Dr 300 To Anbu Account 300 Being the receipt of part payment. Aug 4 Anbu Account Dr 6 To Interest Account 6 Being interest on Rs. 200 at 12% for 3 months. Aug 4 Bills receivable Account Dr 206 To Anbu Account 206 Being new acceptance received. Nov 7 Cash Account Dr 206 To Bills receivable Account 206 Being Amount received on Bill.

In the books of Mr. Anbu May 1

Purchases Account Dr. To Azhagu Account Being Purchases of goods on credit.

Rs. 500

Rs.

500

May 1 Azhagu Account Dr. 500 To Bills Payable Account 500 Being acceptance given. Aug 4 Bills payable Account Dr 500 To Azhagu Account 500 Being cancellation of acceptance. Aug 4 Azhagu Account Dr 300 To Cash Account 300 Being Payment of part payment. Aug 4 Interest Account Dr 6 To Azhagu Account 6 Being interest on Rs. 200 at 12% for 3 months. Aug 4 Azhagu Account Dr 206 To Bills Payable Account 206 Being new acceptance given.



Nov 7

Bills payable Account Dr

206

116

To Cash Account 206 Being acceptance honoured. 6.5.7. Retiring of the Bills Illustration :10. On Ist January, A sold goods to B for Rs. 1,000 and drew upon him a Bill at three months for the amount B accepted the Bill and returned. On 4 th March, B Returned the Bill under rebate of 12% p.a. Record these transactions in the journals of A and B. Solution :

In the books of A In the books of B Jan. 1

B Account Dr. To Sales Account Being goods sold on credit.

Rs. 1,000

Rs. 1,000

Purchase Account Dr. To A Account Being purchase of goods on credit.

Rs. 1,000

Rs. 1,000

Jan. 1 Bills Receivable Account Dr. To B Account Being acceptance received.

1,000 1,000

A Account Dr. To Bills Payable Account Being acceptance given.

1,000 1,000

March4 Cash Account Dr. Rebate Account Dr. To Bills Receivable A/c Being Bill honoured under rebate.

990 10

1,000

Bills Payable Account Dr. To Cash Account To Rebate Account Being acceptance met under rebate.

1,000 990 10

6.5.8. Accommodation Bills i. For the benefit of drawer Illustration: 11. Mr. A accepted a bill for Rs. 20,000 drawn by B to enable the raise funds at three months on Ist October 2007. The bill was duly discounted by B at their Bank at 6% per annum. On the due date B remitted the amount to the acceptor and the Bill was duly met. Pass journal entries in the books of both the parties. Solution :

In the books of B In the books of A 2004 Oct. 1

Bills Receivable A/c Dr. To A Account Being Bill drawn on A for 3 months.

Rs. 20,000

Rs. 20,000

B Account Dr. To Bill Payable A/c Being acceptance of Bill drawn by B.

Rs. 20,000

Rs. 20,000

Oct. 2 Cash Account Dr. Discount on Bills A/c Dr. To Bills Receivable Being Bill dishonoured at 6% p.a.

19,700 300

20,000 --

2005 Jan.4

A Account Dr. To cash Account Being amount paid to A to meet the Bill on the due date.

20,000 20,000

Cash Account Dr. To B Account Being cash received from B to honour the Bill.

20,000 20,000

Jan. 4

---

Bills Payable A/c Dr. To cash Account Being bill honoured on maturity.

20,000 20,000



117 ii. For Mutual benefit Illustration :12. Mr. Ram draws a Bill for Rs. 15,000 on Mr. Gopal on Ist January payable three months after the date at Canara Bank, Coimbatore. The Bill after acceptance is discounted by Ram at 6%p.a. and he remits 1/3 of the proceeds to Gopal. On the due date, Ram sends the necessary amount to Gopal who meets the Bill. Record these transactions in the journal of both the parties. Solution:

In the books of Ram In the books of Gopal Jan. 1

Bills Receivable A/c Dr. To Gopal Account Being Acceptance received from Gopal.

Rs. 15,000

Rs. 15,000

Ram Account Dr. To Bill Payable A/c Being Ram’s bill accepted.

Rs. 15,000

Rs. 15,000

Jan. 1 Cash Account Dr. Discount on Bills A/c Dr. To Bills Receivable A/c Being Bill dishonoured at 6% p.a.

14,775 225

15,000

---

Jan. 1 Gopal Account Dr. To Discount on Bills A/c To cash Account Being 1/3 of proceeds and 1/3 of discount charges transferred.

5,000 75

4,925

Cash Account Dr. Discount on Bills A/c Dr. To Ram Account Being 1/3 of proceeds and 1/3 of discount charges transferred.

4,925 75

5,000

April4 Gopal Account Dr. To Cash Account 2/3 of the Bill sent to Gopal, who met the Bill.

10,000 10,000

Cash Account Dr. To Ram Account Being 2/3 contribution received from Ram.

10,000 10,000

April4 ---

Bills Payable A/c Dr. To Cash Account Being Bill paid on maturity.

15,000 15,000

iii. Two Bills Illustration :13. Mr. A drew a Bill on B on November Ist, 2007 for an amount Rs. 4,000 payable three months after that date. On the very same date Mr. A accepted a Bill for Rs. 4,000 drawn by B for a period of three months. Both the parties discounted their Bills at 12% p.a. On the due date both the Bills were honoured. Make journal entries in the books of both the parties. Solution :

In the books of A In the books of B 2007 Nov. 1

Bills Receivable A/c Dr. To B Account Being Acceptance of B received.

Rs. 4,000

Rs.

4,000

A Account Dr. To Bill Payable Being acceptance given to A.

Rs. 4,000

Rs.

4,000

Nov.1 B Account Dr. To Bills Payable A/c Being acceptance given to B.

4,000 4,000

Bill Receivable A/c Dr. To A Account Being acceptance received.

4,000 4,000

Nov.1 Cash Account Dr. Discount on Bills A/c To Bills Receivable A/c Being discounting of Bill at 12% p.a..

3,880 120

4,000 --



118

Nov.1

--

Cash Account Dr. Discount on Bills A/c Dr. To Bills Receivable A/c Being discounting of Bill at 12% p.a..

3,880 120

4,000

Feb.4 Bills Payable A/c Dr. To Cash A/c Being the Bill is met.

4,000 4,000

---

Feb.4 --

Bills Payable A/c Dr. To Cash Amount being the bill is met.

4,000 4,000

6.5.9. Insolvency : Illustration :14. Balan draw a three months Bill on Sekhar for Rs. 4,000 on Ist April 2007. Sekhar accepts the Bills and sends it to Balan, who gets it discounted with his bank for Rs. 3,940. Balan immediately remits Rs. 985 to Sekhar. On the due date, Balan being unable to remit the amount due, accepts a Bill for Rs. 4,500 for three months which is discounted by Sekhar for Rs. 4,440. Sekhar sends Rs. 330 to Balan. Before the maturity of the second Bill Balan becomes insolvent and his estates paying 40 paise in the rupee. Give journal entries in the books of Balan and Sekhar. Also, show the ledger accounts. Solution : In the books of A Dr. Cr. In the books of B Dr. Cr. 2007 April 1

Bills Receivable Account Dr. To Sekhar Account Being Acceptance received.

Rs. 4,000

Rs. 4,000

Balan Account Dr. To Bill Payable Account Being acceptance given .

Rs. 4,000

Rs. 4,000

2007 April1

Bank Account Dr. Discount on Bill Account Dr. To Bills Receivable A/c Being Bills Discounted.

3,940 60

4,000 --

2007 April1

Sekhar Account Dr. To Discount Account To Bank Account Being remittance of amount less discount.

1,000 15 985

Bank Account Dr. Discount Account Dr. To Balan Account Being share received from Balan less discount.

985 15

1,000

July 4 Sekhar Account Dr. To Bills Payable Account Being acceptance given.

4,500 4,500

Bills receivable Account Dr. To Balan Account Being acceptance received.

4,500 4,500

July 4

--

Bank Account Dr. Discount on Bills Account Dr. To Bills Receivable A/c Being acceptance discounted.

4,440 60

4,500

July 4 --

Bills Payable A/c Dr. To Bank Account Being own acceptance.

4,000 4,000

July 4 Bank Account Dr. Discount on Bills Accounts Dr. To Sekhar account Being receipt of share on discounting of bill.

330 45

375

Balan Account Dr. To Discount on Bills A/c To Bank Account Being remittance of share of proceeds to Balan.

375 45 330



Oct. 7

Bills Payable Account Dr. To Sekhar Account Being Bill dishonoured by Sekhar.

4,500

4,500

Balan Account Dr. To Bank Account Being dishonour of Bill by Balan.

4,500

119 4,500

Oct. 7 Sekhar Account Dr. To Bank Account To Deficiency Account Being cash paid to Sekhar 40 paise in the rupee.

3,375 1,350 2,025

Bank Account Dr. Bad Debts Account Dr. To Balan Account Being cash received at 40 paise in the rupee.

1,350 2,025

3,375

Sekhar Account. Date Particulars JF Amount

Rs Date Particulars JF Amount

Rs. 2007 April 1

To Discount A/c

15

2007 April1

By Bill Receivable A/c

4,000

April 1 To Bank A/c 985 July 4 By Bank A/c 330 July 4 To Bills Payable A/c 4,500 July 4 By Discount on Bills A/c 45 Oct. 7 To Bank A/c 1,350 Oct. 7 By Bills Payable A/c 4,500 Oct. 7 To Deficiency A/c 2,025 8,875 8,875

Balan Account Date Particulars JF Amount

Rs Date Particulars JF Amount

Rs. 2007 April 1

To Bills Payable A/c

4,000

2007 April1

By Bank A/c

985

July 4 To Discount on Bills A/c 45 April1 By Discount on Bills A/c 15 July 4 To Bank A/c 330 July 4 By Bills Receivable A/c 4,500 Oct. 7 To Bank A/c 4,500 Oct. 7 By Bank A/c 1,350 Oct. 7 By Bad Debts A/c 2,025 8,875 8,875

6.6. Let Us Sum Up: In this lesson we have discussed theriotical aspects of bills of exchange and practical solutions to various occasions of bills of exchange followed by sufficient number of unsolved problems. 6.7. Lesson End Activities 6.7.1. Discharge of Bills : Exercise : 1. A sold goods to B for Rs. 10.000 on 1 st January, 2007. A drew a bill upon him for there months for the amount. B accepted the bill and returned it to A. On the due date, the bill was paid. Pass necessary journal entries in the books of A and B. Exercise: 2. On 1-1-2007, Jayanthy sold goods to Devi on Credit for Rs. 2,000 and drew a bill on Devi for Rs. 2,000 for 3 months after date. Devi accepted it on 3-1-2007 and returned it to Jayanthy, On Maturity, the bill was duty honored by Devi. Pass Journal entries in the books of both the parties. 6.7.2. Discounting the Bill Exercise :3. On February 1,2007, A drew a bill on B for two months for Rs.12,000 B accepted the draft and returned it to A. A discounted the bill immediately with his bankers at 18% per annum. Pass necessary journal entries in the books of all the parties concerned Exercise : 4. Mala purchased goods for Rs. 3,000 form Kala on 1-4-2007, Mala accepted a three months’ bill for the amount and gave it to Kala the same day. Kala discount it



immediately with Indian Bank at discount of 5% p.a. On due date the bill was honoured by payment. You are required to give entries in the books of all the parties.

120 6.7.3. Endorsing the Bill Exercise: 5. A drew on B a bill on March 1, 2007 for two months for Rs. 7,000 which B accepted and returned to A. The bill is endorsed one month after the accepted in favor of C. On the due date, the bill was honoured. Pass necessary journal entries in the books of all the parties concerned Exercise : 6. On 1-4-2007 Balu draws a bill on Ravi for Rs. 1,600 for goods sold at 90 days after sight. Ravi accepts the bill on 5-4-2007. Balu, however, endorsed the bill to Sohan in settlement of a debt of Rs. 1,700. On maturity the bill was duly honoured by Ravi. Show the journal entries in the books of all the parties. 6.7.4. Bills Sent for Collection : Exercise: 7. A drew a bill on B for Rs. 5,000 payable two moths after date. Immediately after its acceptance A sent the bill to his banker for collection. On the due date bank collects the bill and sends the advice of collection after deducting Rs. 25 as collection charges. Pass journal entries in the books of all parties. Exercise: 8. On 1-5-2007 Mohan gave his acceptance for three months bill of Rs. 6,000 drawn by of Murali. Murali sent the bill to bank for collecting the amount on maturity. After maturity Murali received intimation form the bank that the bill was duly honoured by Mohan and Bank charged Rs.20 for collection. Show the entries in the books of Murali and Mohan 6.7.5. Dishonour of Bills Exercise: 9. Mohan owes Shyan Rs. 6,000 on 1 st January, 2007 Mohan accepts a three-month bill for Rs. 5,900 being in full settlement of the claim. At its due date the bill is dishonored. Noting charges are paid by Shyam Rs. 50. Give journal entries in the books of Mohan .Exercise: 10. On 1 st June 2007, Murugan sells goods to Selvam for Rs. 3,500 and draws three bills on him, the first for Rs. 800 for One month, the second for Rs. 1,200 for 2 months and the third for Rs. 1,500 for 3 months. Selvam accepts and returns these bills to Murugan. The first bill is by Murugan till the date of maturity. The second bill is endorsed by Murugan to his creditor Ramu on 3 rd June 2007 and the third bill is sent to the bank for collection on 4 th June 2007. On maturity all bills were dishonored and noting charges paid were Rs. 10. Rs. 20 and Rs. 30 respectively. You are required to pass journal entries in the books of Murugan, Selvam and Ramu. Exercise: 11. Mohan owes Shyam Rs. 4,000 on 1 st January 2007. Mohan accepts a three month bill Rs. 3,900 in satisfaction of his full claim. On the same date it was endorsed by Shyam to Gyam in satisfaction of his claim of Rs. 3,980. The bill is dishonored on the due date, give journal entries in the books of Shyam. 6.7.6. Renewal of the Bills: Exercise: 12. K having accepted a bill for Rs. 15,000 is unable to meet the same. Before the due date he request L to receive Rs. 13,200 in cash and to draw on him a new bill for Rs. 2,000 for a further period of 2 months and cancel the old bill. L agree to his proposal. Pass journal entries in the books of both the parties. Exercise: 13. Kalai owed to Venu Rs. 12,000 on 1-1-2007. On the same date Venu drew upon Kalai a bill for the amount at 2 months and Kalai returned the bill duly accepted Venu



got the bill discounted at his bank at 6% p.a. Before the bill was due for payments Kalai told Venu that the he was not able to pay the full amount and requested Venu to accept Rs. 4,500 immediately and draw upon him another bill for the remaining amount for two months together with interest at 8% p.a. Venu agreed. The second bill was duly met. Give Journal entries in the books of Venu and Kalai.

121 6.7.7. Retiring of the Bills Exercise. 14. Ajay purchased goods form Vijay for Rs. 2,000 on 1st January, 2007. He accepted a bill of exchange for the amount at 2 months drawn on him by Vijay on the same day. On 4th January, 2007, Vijay got the bill discounted with his bank at 18% per annum. At maturity ,The bill was dishonored, noting charges amounting to Rs.15,however. Vijay agreed to receive a sum of Rs.575 from Ajay in cash and two promissory notes- one at one month for rs.500 and the other at 3 months for Rs. 1,000 in full settlement. The first promissory note was duly honored but the second promissory note was dishonored due to Ajay’s insolvency. Vijay could recover 30%of the amount due from him. Show journal entries in the books of both the parties and Ajay’s account in Vijay’s ledger . Exercise: 15. On 1st February, Ram received form Hari three acceptances for Rs. 6,000, Rs. 8,000 and Rs. 10,000 for two months. The first Bill for Rs. 6,000 was endorsed to Mohan; the second Bill for Rs. 8,000 was held till due date; and the third Bill for Rs. 10,000 was discounted for Rs. 50. At maturity all the Bills were dishonoured. Give journal entries in the books of Ram and the ledger accounts in the books of Hari, in respect of these transactions. 6.7.8. Accommodation Bills Exercise: 16. On 1st January, 2007, B accepted a three month bill for Rs, 20, 000 drawn on him by A for latter’s benefit. A discounted the bill on 4th January @ 20% per annum and on the due date sent B a cheque for Rs 20,000 in order to enable him to honor the bill. B duly honored his acceptance. Pass journal entries in the books of A and B. Exercise: 17. On 1 st May 2007 Madhan accepted a tow month bill for Rs. 10,000 drawn on him by Mani for the latter’s benefit. Mani discounted the bill on 4th may @ 12% p.a. and on the due date sent Madhan a cheque for Rs. 10,000 in order to enable him to honor the bill. Madhan duly honored his acceptance. Pass journal entries in the books of Mani and Madhan. Exercise: 18. For the mutual accommodation of P and Q, P draws a bill on Q for Rs. 15,000. Q accepts the bill and returns it to P. He discount the same with his bankers and receives Rs.14,640. The proceeds are shared between P and Q in proportion of 2/3 and 1/3 respectively. On the due date P remits his portion to Q who meets the bill. Pass journal entries in the book of P and Q to record the above transactions. Exercise: 19. For their mutual accommodation, Bala draws a bill on Gani for Rs.8.000 for 3 months on 1.1.2007 Gani accepts the bill and returns it to Bala. Bala discounts the bill with the bank for Rs. 7,900 and remits half the proceeds to Gani Before maturity Bala remits the amount due to Gani and Gani honors the bill. Show the entries in the books of Bala and Gain. Exercise: 20. On 1st July 2007, G drew a bill for Rs.80, 000 for 3 months on H for mutual accommodation. He accepted the bill of exchange. G had purchased goods worth Rs. 81,000 form J on the same date. G endorsed H’s acceptance to J in full settlement. On 1st September



2007, J purchased goods worth Rs. 90,000 from H. J endorsed the bill of exchange received from G to H and paid Rs. 9,000 in full settlement of the amount due to H. On 1st October, 2007, H purchased goods worth Rs. 1, 00,000 from G. He paid the amount due to G by cheque. Give the necessary Journal Entries in the books of H.

122 Exercise: 21. On 1-1-2007, Ramya and Priya draw on each other at 2 months for Rs. 3,000 for their mutual accommodation. They discount each other’s bill at 12% p.a. and on maturity, each party honors her own acceptance. Record the transactions in the journals of Ramya and Priya. 6.7.9. Insolvency : Exercise: 22. For the mutual accommodation of X and Y on 1st April, 2007 X drew a four months bill on Y for Rs. 4,000. Y returned the bill after acceptance on the same date X. On due date X discounts the bill form his bankers @6% per annum and remit 50% of the proceed to Y. On due date X is unable to send the amount due and therefore Y draws a bill for Rs. 7,000, which is duly accepted by X. Y discounts the bill for Rs.6,600 and sends Rs. 1,300 to X. Before the bill is due for payment X becomes insolvent. Latter 25 paisa in a rupee are received form his Estate. Record Journal Entries in the book of X. Exercise: 23. On 1-1-2007, Yasmin and begum for their mutual accommodation drew on each other bills for Rs.5,000 each payable after three months. On 4-1-2007, they discount with their bankers each other’s bill @ 12% p.a. On due date, Yasmin meets her bill and Begum fails to meet her acceptance. Begum then accepts a bill of Rs. 5,500 including Rs. 500 interest for renewal of bill. drawn by Yasmin on 4-3-2007 payable after one month. Yasmin immediately gets the bill discounted for Rs. 5,250.On 5-4-2007. Begum become insolvent and a final dividend of 40 paise in a rupee is received from her estate on 6-5-2007. Pass journal entries in the books of Yasmin and Begum. Also show Begum’s Account in Jasmine’s ledger. Exercise: 24. On 1st January 2007, A draws a bill on B at four months for Rs. 1,000and B draws on A for similar amount and term. Both the bills are accepted and discounted at 6% p.a. A meets his own acceptance at maturity, but B’s acceptance is dishonored. B then accepts a new Bill at three months for the amount due by him plus interest at 8% p.a. which is duly met at maturity. Journal the above transaction in the books of A and B. Exercise: 25. X draw a Bill for Rs. 1,500 and Y accepts the same for the mutual accommodation of both of them to the extent of X-2/3 and Y-1/3. X discounts the same for Rs. 1,410 and remits 1/3rd of the proceeds toY. Before the due date, Y draws another Bill for Rs.2, 100 on X, in order to provide funds to meet the first Bill. The second Bill is discounted for Rs. 2,040 with the help of which the first Bill is met and Rs. 360 is remitted to X. Before the due date of the second Bill X becomes insolvent and Y receives a dividend of 50 paise in the Rupee in full satisfaction. Pass necessary entries in the books of X and Y. 6.8. Model Answers to Check your Progress : Solutions to questions given under head are almost journal entries in the nature Questions under the head exercises are given under the same manner of sub headings as in the case of illustrations. Therefore, students are requested to refer respective illustration for answering the exercise questions. 6.9 References:



Financial Accounting – R.L. Gupta – Sultan chand & Sons Advanced Accounting – S.N. Mageswari – Vikas Publishers



122 A

LESSON 7

AVERAGE DUE DATE

Contents 7.0. Aims and Objectives 7.1. Introduction 7.2. Meaning 7.3. Uses 7.4. Types 7.5. Illustrations 7.6. Let Us Sum Up 7.7. Lesson End Activities 7.8. Model Answers to Check your Progress 7.9 References 7.0. Aims and Objectivities : In this lesson we are going to discuss

· the significance of average due date

· uses of average due date

· application to concepts of average due date in the various accounting situations.





123

7.1. Introduction : Where account person, owing several debts due on different dates, wishes to pay the total amount due on one particular date, the date must be such that neither the debtor nor the creditor lose anything by way of interest. An idea of average due date is important because calculation of such a date, where there is no loss to either party, gives an important hint that if payment is not done on that date, then the party receiving the payment suffers the loss. The present chapter deals with the meaning of average due date, calculation of average due date in different cases and amount of interest thereon. 7.2. Meaning : Average Due Date is the date on which several debts due on different dates can be paid by a single payment without any loss of interest either to debtor or creditor. Average Due Date of Equated Due Date is the arithmetic average of several due dates. When a person owes various amounts on different dates to another, it may be desired to discharge the debts on a single date by a lump sum payment without any loss of interest to either party. Such an equated date of payment is called the Average Due Date. The application of the average due date comes into use in settlement of accounts, such as, Bill transactions, payment of credit transactions, calculation of interest on drawings by partners etc. 7.3. Uses : Average due date is useful in the following types of accounting problems : a.. Problems relating to settlement of accounts involving a series of bills of exchange due

on different dates. b.. Problems relating to calculation of interest of partners’ drawings made on different

dates. c.. Problems involving piece-meal relation of assets during the partnership dissolution. d.. Problems involving settlement of accounts where money advanced is to be received in

a number of installments due on different dates. 7.4. Types : Procedure for calculation of Average Due Date varies according to the type of the problem involved. Following are the two types of situations : 1. Lending in installments but repayment in one lump sum. 2. Lending in lump sum but repayment in installments.

Total of Product Average Due date = Base Date +

Total of Amounts

7.5. ILLUSTRATIONS

7.5.1. Lending in Installments but repayment in lump sum. i. When Due Dates are Given : Illustration : 1. Raman owes Balan the following sums of money due on the dates stated: Rs. 400 due on 5th January 2004 Rs. 200 due on 20th January 2004 Rs. 800 due on 4th February 2004 Rs. 100 due on 26th February 2004 Rs. 50 due on 10th March 2000 Calculate Average Due Date



124 Solution.

Calculation of Average Due Date Base date = 5th January 2004.

Due Date Amount

Rs. Number of days

From 5th January Product

05.01.2004 400 0 0 20.01.2004 200 15 3,000 04.02.2004 800 30 26+4. 24,000 26.02.2004 100 52 26+26. 5,200 10.03.2004 50 65 26+29+10. 3,250 1,550 35,450


Total of Amounts = 5th January + 22.8 or 23 days = 28th January 2004. Illustration : 2. A owes B the following sums of money due on the dates stated. Calculate the average due date. Rs. 1,000 due on Jan. 1, 2007 ; Rs. 2,000 due on Feb. 1, 2007 Rs. 3,000 due on Mar. 1, 2007 ; Rs. 4,000 due on April 1, 2007. Solution.

Calculation of Average Due Date Base date = 1st January 2007.

Due Date Amount Rs.. No. of Days

from base date Product

01.01.2007 1,000 0 0 01.02.2007 2,000 31 30+1. 62,000 01.03.2007 3,000 59 30 + 28 + 1. 1,77,000 01.04.2007 4,000 90 30 + 28 + 31 + 1. 3,60,000

10,000 5,99,000 Total of Product

Average Due date = Base Date + Total of Amount

= 01.01.2007 + 60 days = 02.03.2007 Note : In calculating days, the date of transaction is ignored. Illustration : 3. X owes Y the following sums of money due from him on the dates stated:

Rs. 3,000

due on

March 10, 2007

10,000 due on April 2, 2007 40,000 due on April 30, 2007 1,000 Due on June 10, 2007

He wants to make the complete payment on 30th June, 2007. Calculate interest at 15% per annum with the help of average due date method.

35,450 = 5th January +

1,550

5,99,000 = 01.01.2007 +

10,000



125 Solution.

Calculation of Average Due Date Zero date = March 10, 2007

Due Date Amount No. of Days

from base date Product

March 10, 2007 3,000 0 0 April 2, 2007 10,000 23 21+2. 2,30,000 April 30, 2007 40,000 51 21+30. 20,40,000 June 10, 2007 1,000 92 21+30+31+10. 92,000 54,000 23,62,000


Total of Amount = March 10 + 43.74 days = April 23.2007.

Interest will be calculated on the total amount, i.e., Rs. 54,000 for 68 days, i.e., the days from the average due date to the settlement date, i.e., from April 23 to June 30,

15 x 68 x Rs. 54,000 Interest =

100 x 365 = Rs. 1,509.

ii. Interest on Drawings Illustration : 4. A Partner has withdrawn the following sums of money during the half year ending 30.06.2007. January 15 Rs. 300 April 20 Rs. 400 February 18 Rs. 250 May 16 Rs. 300 March 10 Rs. 150 June 18 Rs. 500 March 26 Rs. 200 Interest is to be charged at 8% p.a. Find out the average due date and calculate the amount of interest to be debited to the partner. Solution.

Computation of Average due date Base date 15.01.2007

Date Amount Rs.. No of days from

Base date Product Rs..

15.01.2007 300 0 0 18.02.2007 250 34 8,500 10.03.2007 150 54 8,100 26.03.2007 200 70 14,000 20.04.2007 400 95 38,000 16.05.2007 300 121 36,300 18.06.2007 500 154 77,000

2,100 1,81,900

Total of Products Average due date = Base date +

Total of Amounts days

23,62,000 = March 10 +

54,000

181900 = 15.01.2007+

2,100 days



126 Average due date = 15.01.2007 + 87 days = 12.04.2007.

Amount of Interest = 2,100 x 8/100 x 79/365= Rs. 36.36

Illustration : 5. Sunil is a partner in a firm Sunil, Sharad & Co. His drawings from the business during the year 2007 are as follows : Month Rs. Month Rs. Jan. 31 150 Jul. 31 250 Feb. 28 100 Aug. 31 150 Mar. 31 160 Sep. 30 120 Apr. 30 200 Oct. 31 100 May 31 140 Nov. 30 180 June 30 70 Dec. 31 300 You are required to calculate the Average Due Date and the amount of interest @ 10% p.a. payable by Sunil for his transactions, taking Dec. 31 as the basic date. Solution.

Computation of Average due date Base date 31.12..2007

Date Amount Rs.. No of days before

Base date ProductsRs..

1990 Jan. 31 Feb. 28 Mar. 31 Apr. 30 May 31 June 31 July 31 Aug. 31 Sep. 30 Oct. 31 Nov. 30 Dec. 31

150 100 160 200 140 70

250 150 120 100 180 300

11 10 9 8 7 6 5 4 3 2 1 0

1,650 1,000 1,440 1,600

980 420

1,250 600 360 200 180

0 1,920 9,680


Total of Amounts months

Average due date = 31.12.2007 + 5 months = 31.07.2007.

9,680 = 31.12.2007+

1,920 months



127 iii. When due date is not given Illustration : 6. Sheela drew the following Bills of Exchange on during the year 2007.

Date of drawing of Bill of exchange Amount Term Rs. 12th January 500 2 months 14th February 300 2 months 20th March 1,000 1 month 4th April 500 1 month 15th May 600 2 months Solution.

Calculation of Average Due Date Base Date 15-03-2007

Bill Date

Period Due Date

Amount Rs.

Number of days from base date

Product

12.1.07 2 months 15.3.07 500 0 0 14.2.07 2 months 17.4.07 300 33 16+17. 9,900 20.3.07 1 month 23.4.07 1,000 39 16+23. 11,500 4.4.07 1 month 7.4.07 500 23 16+7. 11,500 15.5.07 1 month 18.5.07 600 6416+30+18. 38,400

2,900 98,800 Total of Product

Average Due date = Base Date + Total of Amount

= 15.3.07 + 34 days = 18.4.2007. Illustration : 7. Find out an Average Due Date from the following details:

Date of Acceptance Period Amount 15th June 2007 3 months 1,000 20th July 2007 2 months 2,000 10th August 2007 3 months 3,000 26th September 2007 3 months 4,000 Solution.

Base Date 18.09.2007.

Date of acceptance Period Due Date

Amount Rs.

No. of days ProductRs.

15th June 2007 3 months 18 Sep. 1,000 0 0 20th July 2007 2 months 23 Sep. 2,000 5 10,000 10th August 2007 3 months 13 Nov. 3,000 56 1,68,000 26th September 2007 3 months 29 Dec. 4,000 102 4,08,000 10,000 5,86,000

Total of Product Average due date =Base date+

Total of Amount Days

98,800 = 15.03.07 +

2,900

5,86,000 18.09.2007+

10,000 = 59 Days



128 Average Due Date = Base date + Equated Period = 18.09.2007 + 59 days = 16.11.2007 iv. When Due Date falls on public holiday Illustration : 8. The following amounts are due to Ezil by Satya. Find out average due date. Due Dates Rs.

10.01.2007 1,000 26.01.2007 Republic day. 2,000 23.03.2007 6,000 18.08.2007 Sunday. 8,000

Solution. Computation of Average due date

Base date 10.01.2007 Due dare Nominal.

Due date actual.

No. of days from Base date

Amount Rs.

Product Rs.

10.01.2007 10.01.2007 0 1,000 0 26.01.2007 25.01.2007 15 2,000 30,000 23.03.2007 23.03.2007 72 6,000 4,32,000 18.08.2007 17.08.2007 219 8,000 17,52,000

17,000 22,14,000

Total of Product Average due date = Base date +

Total Amount days.

= 10.01.2007 + 130 days = 20.05.2007 v. When Saving of amount of interest is required Illustration : 9. Red owes White the following sums of money due from him on the dates stated. Rs. 300 due on March 10, 2007 Rs. 1,000 due on April 2, 2007 Rs. 4,000 due on April 30, 2007 Rs. 100 due on June 10, 2007 He wants to make the complete payment on 30th June 2007. Calculate Interest at 5% per annum with the help of average due date method. Solution.

Calculation of Average Due Date Base Date : 10.03.2007.

Due Date Amount

Rs.. No. of Days

from Base Date Product

Rs. 10.03.2007 300 0 0 02.04.2007 1,000 23 21+2. 23,000 30.04.2007 4,000 51 21+30. 2,04,000 10.06.2007 100 92 21+30+31+10. 9,200

5,400 2,36,200

22,14,000 Average due date = 10.01.2007+

17,000 days



129 Total Product

Average due date = Base date +

Total Amount

= 10.03.2007+43.74 or 44 days = 23.04.2007. Illustration : 10. Mani has accepted the following bills drawn by Sharma :- On 08.03.2007 Rs. 8,000 for 4 months

On 16.03.2007 Rs. 10,000 for 3 months

On 07.04.2007 Rs. 12,000 for 5 months

On 17.05.2007 Rs. 10,000 for 3 months

He wants to pay all the bills on a single day. Find out this date. Interest is charges at 18% p.a. and Mani wants to save Rs. 300 by way of interest. Find out the date on which he has to effect the payment to save interest of Rs. 300. Solution.

Computation of Average due date Base date 19.06.2007

Due date Amount Rs..

No. of days from base date

Product Rs..

11.07.2007 8,000 22 1,76,000 19.06.2007 10,000 0 0 10.09.2007 12,000 83 9,96,000 20.08.2007 10,000 62 6,20,000

40,000 17,92,000


Total of Amounts days

= 19.06.2007 + 45 days

Average due date = 03.08.2007

Interest per day = 40,000 x 18/100 x 1/360 = Rs. 20

In order to save Rs. 300, he must pay 15 days earlier.

03.08.2007 – 15 days = 19.07.2007

2,36,200 = 10.03.2007+

5,400

17,92,000 = 19.06.2007+

40,000 days



130 vi. Mutual obligations Illustration : 11. Mr. Kapoor has the following Bills Receivable and Bills Payable against Mr. Ramanathan. Calculate the Average Due date when the payment can be made or received without any loss of interest to either party.

Bills Receivable Bills Payable Date Amount Tenure months Date Amount Tenure months.

01.05.2007 2,000 4 10.05.2007 1,000 2 12.06.2007 1,500 2 29.05.2007 3,000 4 15.06.2007 3,000 3 06.06.2007 2,000 2 07.07.2007 1,000 2 17.06.2007 1,500 3 10.07.2007 2,500 1 30.06.2007 500 1 Gazetted Holidays intervening in the period : 15th Aug. 2007 2nd October 2007 18th September 2007 Emergency Holidays. Solution.

Calculation of Average Due Date Base date 13.07.2007

Bills Receivable Bills Payable

Date Due Date Amount

No. of

days from July 13.

Product Date Due Date Amount

No. of

days from July 13.

Product

01.05.2005

04.09.2005

2,000 53 1,06,000 10.05.200

5 13.07.200

5 1,000 0 -

12.06.2005

14.08.2005

1,500 32 48,000 29.05.200

5 01.10.200

5 3,000 80 2,40,000

15.06.2005

19.09.2005

3,000 68 2,04,000 06.06.200

5 09.08.200

5 2,000 27 54,000

07.07.2005

10.09.2005

1,000 59 59,000 17.06.200

5 20.09.200

5 1,500 69 1,03,500

10.07.2005

13.08.2005

2,500 31 77,500 30.06.200

5 02.08.200

5 500 20 10,000

10,000 4,94,500 8,000 4,07,500

Difference in Products 4,94,500-4,07,500 87,000

Base Date + Difference in Amounts

= 10,000-8,000

= 2,000

= 45 days

Average Due Date = Base Date + 45 = 13.07.2007 + 44 days = 26.08.2007

Note : When the due date of a bill after adding three days of grace falls on a public holiday, then due date will be on the working day preceding the public holiday. When due date of a bill after adding three days of grace falls on such a day which has been suddenly declared a public holiday, then its due date will be on the succeeding working day after the emergency holiday.



131 Illustration : 12. Kumaran had the following bills receivable and bills payable against Raman. Calculate the average due date when the payment can be made or received without any loss of interest to either party. Note : Holidays intervening in the period : 15th August 2007, 16th August 2007, 6th September, 2007.


Date AmountRs. Tenure

Months. Date AmountRs.

Tenure months.

01.06.2007 3,000 3 29.05.2007 2,000 2 05.06.2007 2,500 3 03.06.2007 3,000 3 09.06.2007 6,000 1 10.06.2007 6,000 2 12.06.2007 10,000 2 13.06.2007 9,000 2 20.06.2007 15,000 3 27.06.2007 13,000 1 Solution.

Calculation of Average Due Date Base date = 12.07.2007


Date Amount

Rs. Days

Product Rs..

Date Amount

Rs. Days

Product Rs..

04.09.2007 3,000 54 1,62,000 01.08.2007 2,000 20 40,000 08.09.2007 2,500 58 1,45,000 05.09.2007 3,000 55 1,65,000 12.07.2007 6,000 0 0 06.09.2007. 14.08.2007 10,000 33 3,30,000 15.08.2007. 13.08.2007 6,000 32 1,92,000 14.08.2007 9,000 33 2,97,000 23.09.2007 15,000 73 10,95,000 16.08.2007. 30.07.2007 13,000 18 2,34,000 36,500 17,32,000 33,000 9,28,000

Difference in Product Average due date = Base date+

Difference in amount

= 229.7 Days. = 230 Days. Average due date = July 12 + 230 Days = 27.02.2007 7.5.2. Lending in lumpsum but repayment in instalments i. Repayable in equal instalments Illustration : 13. Mr. A had lent Rs. 5,000 to B on 1st Jan. 2006. Loan is repayable in 5 half-yearly instalments commencing from 1st Jan. 2007 Interest is changed at 12%. Calculate Average Due Date.

17,32,000 – 9,28,000 =

36,500 – 33,000

8,04,000 =

3,500



132 Solution.

Calculation of Average Due Date Base date = 01.01.2006.

Instalments Due Date Months since Jan. 1st 2006

1st Jan. 1 2007 12 months 2nd July 1 2007 18 months 3rd Jan. 1 2008 24 months 4th July 1 2008 30 months 5th Jan. 1 2009 36 months

120 months Average Due Date = 01.01.2006+120/5 = 01.01.2006+24 months = 01.01.2008 Amount of interest = 5,000 x 12/100 x 24/12 = Rs. 1,200 ii. Repayable in unequal instalments Illustration : 14. Rs. 15,000 let on 1st January 2004 is repayable as below : Rs. 1,000 on 1st January 2005 Rs. 3,000 on 1st January 2007 Rs. 5,000 on 1st January 2008 Rs. 6,000 on 1st January 2009 Determine the Average Due Date for settling all the above installments by single payment and complete interest at 6%p.a. Solution.

Calculation of Average Due Date Base date = 01.01.2004.

Due Date Amount

Rs. No. of months from

01.01.2000 Products

1st Jan. 2005 1,000 12 months 12,000 1st Jan. 2007 3,000 36 months 1,08,000 1st Jan. 2008 5,000 48 months 2,40,000 1st Jan. 2009 6,000 60 months 3,60,000

15,000 7,20,000 Average Due Date = 1st Jan. 2004+7,20,000/15,000 = 1st Jan. 2004+48 months = 1st Jan. 2004+4 years = 1st January 2008

15,000x4x6 Interest for four years =

100 = Rs. 3,600

7.6. Let Us Sum Up : In this lesson we have discussed the areas in which the technique of average due date is applied practically followed by sufficient number of unsolved problems.



133 7.7. Lesson End Activities 7.7.1. Lending in installments but repayment in lump sum i. when due dates are given : Exercise : 1. X owes, Y, the following sum of money due on the dates stated :

Due Date Amount Rs. 05.01.2007 4,000 20.01.2007 2,100 04.02.2007 3,500 26.05.2007 1,000 10.06.2007 500

Find out the Average Due Date. Exercise : 2. A owes B the following sums of money due from him, on the dates stated:- Rs. On March 10 700 On April 2 1,200 On April 30 3,400 On June 10 400 On June 25 200 A wants to make complete payment on June 30th, Calculate interest @ 10%p.a. with the help of average due date method. Exercise : 3. Anand owes Sunil kumar Rs. 870 on 1st January 2007. The following further transactions took place between Anand and Sunil Kumar: January 16 Anand buys goods Rs. 700 February 2 Anand receives cash Rs. 550 March 5 Anand buys goods Rs. 400 Anand pays the whole amount due on 31st March, together with interest at 10% per annum. Calculate the interest by the average due date method. ii. Interest on drawings Exercise : 4. A partner has withdrawn the following sums from the business for his personal use during the half-year ended 30.06.2007. 22.01.07 – Rs. 500 31.01.07 – Rs. 200 18.02.07 – Rs. 100 09.03.07 – Rs. 150 04.05.07 – Rs. 400 30.06.07 – Rs. 1,000 Find the average due date and calculate interest at the rate of 5%p.a. for the half year ended 30.06.07.



134 Exercise : 5. Ananthan draws the following amounts from his business :

Date Amount Rs.. 15.01.2007 1,000 06.03.2007 1,500 21.05.2007 500 24.06.2007 1,000

Calculate a. Average Due Date b. Interest on drawing at 12% p.a. assuming that financial year ends on 30.06.2007. Exercise : 6. A partner has been withdrawing Rs. 600 at the end of each month from January to December for private expenses. According to the partnership deed, interest is charged on drawings @ 12% per annum. Calculate the amount of interest to be charged on drawings by the partner during the year. iii. When due date is not given Exercise : 7. Ramesh drew upon Vinod several bills of exchange due for payment on different dates as under:

Date of the Bill Amount Rs.. Tenure of the Bill 01.06.2007 1,200 3 months 19.06.2007 1,600 2 months 10.07.2007 2,000 3 months 27.07.2007 1,500 3 months 07.08.2007 1,800 1 month 15.08.2007 2,400 2 months

Find out average due date on which payment may be made in one single amount. Exercise : 8. X Sold goods to Y as detailed below :

Date of Invoice Sales Rs.

05.05.2007 2,000 12.05.2007 1,500 19.05.2007 3,000 26.05.2007 2,200 01.06.2007 1,500 03.06.2007 1,000

The payments were agreed to be made by bills payable 90 days for the respective dates of invoice. However, Y wanted to arrange for payment of all the bills to be made on a single date. Calculate the date on which such payment could be made without loss of interest to earlier party.



135 Exercise : 9. A purchased from B, for which he accepted bills drawn by B and the bills were to be honoured after three months from the respective dates of the invoice as per the details given below. Date of Invoice Value of GoodsRs.. 10th Jan. 2004 6,000 20th Feb. 2004 10,000 30th Mar. 2004 5,000 1st May 2004 15,000 10th Jun. 2004 12,000 A preferred to honour all the bills on 15th Oct. 2004 and interest @ 8% p.a. should be calculated with the help of the average due date. iv. When due date falls on public holiday Exercise 10 ‘X’ has the following bills due to ‘Y’ on different dates. They agree to settle the entire account by a cheque. Decide upon the date of the cheque. Rs. 6,000 due on 17.07.2004 Rs. 4,000 due on 15.08.2004 Independence day. Rs. 14,000 due on 18.09.2004 Sunday. Rs. 6,000 due on 03.10.2004. Exercise : 11. The following amounts are due to Raj by vasant. Vasant wants to pay off on 16.08.2007. Interest rate of 6% p.a. is taken into consideration.

Due dates Amount Rs.. 01.08.2007 600 15.08.2007 Independence Day. 1,000 22.09.2007 500 05.10.2007 Sunday. 800

Determine the amount to be paid on 16.08.2007. v. When Saving of amount of interest is required Exercise : 12. Madan has accepted the following bills drawn by Pandey. On 8th Mar. 2007 Rs. 2,000 for 4 months. On 16th Mar. 2007 Rs. 2,500 for 3 months. On 7th Apr. 2007 Rs. 3,000 for 5 months. On 17th May 2007 Rs. 2,500 for 3 months. He wants to pay all the bills a single day. Find out this date. Interest is charged at 18% p.a. and Madan wants to save Rs. 150 by way of interest. Find out the date on which he has to effect the payment to save interest of Rs. 150. vi. Mutual Obligations Exercise : 13. Seetha and Geetha had the following mutual dealings and desire to settle their account on the average due date :

Purchases by Seetha from Geetha during 2004 Rs. January 6 600 February 2 280 March 31 200



136 Sales by Seetha to Geetha during 2004 January 6 1,160 March 9 240 March 20 100 Ascertain the average due date. 7.7.2. Lending in lumpsump but repayable in instalments Exercise 14 Anusha lent Rs. 30,000 to Kavitha on 1st January 2004 which is repayable in 6 equal annual installments commencing from 1st January 2005. Calculate the average due date and amount of each installment at 10% p.a. interest. 7.8. Model Answers to Check your Progress : Exercise 1 : Base Date : January 05 Average due date : February 06 Exercise 2 : Base Date : March 10 Average due date : April 23 Amount of Interest : Rs. 109.92 Exercise 3 : Base Date : January 16 Average due date : January 22 Amount of Interest : Rs. 46.95 Exercise 4 : Base Date : January 22 Average due date : April 22 Amount of Interest : Rs. 22.21 Exercise 5 : Base Date : January 15 Average due date : March 31 Amount of Interest : Rs. 120.00 Exercise 6 : Base Date : January 31 Average Due Date : July 15 Amount of Interest : Rs. 396 Exercise 7 : Base Date : August 22 Average Due Date : September 29 Exercise 8 : Base Date : August 6 Average Due Date : August 21 Exercise 9 : Base Date : January 10 Average Due Date : July 12 Amount of Interest : Rs. 996.72

137



Exercise 10 : Base Date : July 17 Average Due Date : September 3 Exercise 11 : Base Date : August 1 Average Due Date : September 1 Amount of Interest : Rs. 2,892.37 Exercise 12 : Base Date : June 19 Average Due Date : August 3 Date of Payment : July 4 Exercise 13 : Base Date : January 6 Average Due Date : January 1 Exercise 14 : Base Date : January 1, 2004 Average Due Date : July 1, 2007 Amount of Interest : Rs. 10,500 Amount of Instalments: 30,000 + 10,500 = 40,500/6 = Rs. 6,750. 7.9 References: Financial Accounting – R.L. Gupta – Sultan chand & Sons Advanced Accounting – S.N. Mageswari – Vikas Publishers

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137 A

LESSON 8

ACCOUNT CURRENT

Contents : 8.0. Aims and Objectives 8.1. Introduction 8.2. Meaning 8.3. Definition 8.4. Headings of an account current 8.5. Procedure for preparation of account current 8.6. Illustrations 8.7. Let Us Sum Up 8.8. Lesson End Activities 8.9. Model Answers to Check your Progress 8.10 References 8.0. Aims and Objectives : In this lesson we are going to discuss

· meaning of current account

· preparation of account current and different methods.





138

8.1. Introduction When a business grows, customers also increase. When the businessman gets confidences on his customers, he often sells goods on credit and payments are received according to convenience of customers or as agreed upon. Similarly one businessman sells goods to another businessman and also makes purchases form him. Similar is the case with i. Supplier with customers, ii. Lender to its borrower, iii. Agent to his principal, iv. Bankers to his client, v. A co-venture to another co-venture etc. Under these circumstances, each party opens each other’s account in their books of account, which is called running account. The customers purchases goods and make the payments form time to time. 8.2. Meaning An Account Current is a settlement in Debtor and Creditor from containing various transactions that have taken place between two parties during a particular period. Interest is charged on debit items and allowed on credit items at an agreed rate. It is a statement of account which is sent by one person to another after a prescribed period. It contains entry for purchases, sales receipts periods and payments made between them during the period. Record of interest is made for various periods and ultimately its balance indicates the amount which one party has to receive from or pay to another. 8.3. Definition An account current may be defined as “an account of the transaction between two parties during a particular period, in which interest is calculated at as agreed rate on each debit and credit item and the net balance of interest is included on the debit or credit side of the account in the amount column” 8.4. Heading of an Account Current An Account Current is a copy of the ledger account of other party. In the heading of this Account Current, the name of the party to whom it is rendered is first mentioned while the name of the sender appears last. For instance, when Gopal renders an Account Current to Ramu, the heading is RAMU IN ACCOUNT WITH GOPAL, That is, Receiver’s name appears first and sender’s name appears. To facilitate computation of interest on each transaction a special column adjacent to the usual amount on each of the ledger is employed on a purely memorandum basis. The net interest – excess of chargeable or allowable interest or vice versa, is however, charged or allowed as usual on double entry basis. 8.5. Procedure for Preparation of Account Current: There are three methods of calculating the number of days for account current purpose. i.Forward Method:- Under this method, the days are account from the date of transaction if there is no credit period. or from the due date of transaction where a period of credit is granted or bill is used. to the closing date or date of settlement of account current. It includes product method and interest table method. ii.Backward or Époque Method:- In this method, days are counted form the due date of transaction to the opening date of the account current. This method is useful where the opening date of the account current is given..

139



iii.Daily Balance Method or Periodical Balance Method:- This method is generally followed in banks. In this method, days are calculated form the due date of one transaction to the due date of the next transaction.

8.6. ILLUSTRATIONS 8.6.1. Interest Table Method Illustration :1. The following are a series of transactions between A and B for the three months ending on 31 st March 2007. Calculate the amount of interest to be payable by one party to the other @ 10% p.a.

Rs. Jan.1 Opening balance Dr. 5,000 Jan.10 Sold goods to B 10,000 Jan. 15 Cash received from B 10,000 Feb.15 Sold goods to B 10,000 March.1 Cash received from B 5,000

Solution:

B in Account Current with A

Date Particulars Amount Rs.

Date Particulars Amount Rs.

Jan.1 To Balance b/d 5,000 Jan.15 By cash 10,000 Jan.10 To sales 10,000 March.1 By cash 5,000 Feb.15 To Sales 10,000 March.31 By Balance c/d 10,217 Mar 31 To Interest 217 25,217 25,217

Working Note : Computation of Interest i. 5,000 x 90/365 x 10/100

=123

ii. 10,000 x 80/365 x 10/100

=220

iii. 10,000x44/365x10/100

=121

iv. 10,000 x 75/365x10/100

= 06

v. 5,000x30/365x10/100

= 41

Total Interest to be charged to B = 123 + 220 + 121. – 206 + 41. = Rs 217



140 8.6.2. Product Method. Illustration:2. Mr. B. the following transaction with A during the year 2007

Rs. June.1 Balance due from A 600 July 15 Sold goods to A 1,900 Aug. 10 Received cash form A 1,100 Aug. 19 Purchased goods form A 700 Sept. 3 Returned goods to A 300 Sept. 16 Received cash from A 500

Prepare an Account Current to be rendered by B to A as on 30 th September 2007 calculating interest at 10% p.a. Solution : A in Account Current with B as on 30 th September 2007

Date Particulars Amt Rs.

Days

Product Rs

Date Particulars Amt Rs.

Days

Product Rs

2007 2007 July1 To Balance b/d 600 92 55,200 Aug 10 By Cash A/c 1,100 51 56,100 July15 To sales A/c. 1,900 77 1,46,300 Aug 19 By Purchases A/c 700 42 29,400 Sep.3 To Purchases 300 27 8,100 Sep. 16 By Cash A/c 500 14 7,000 Returns Sep.30 By Balance of products 1,17,100 Sep. 30

To Interest 1,17,100x10/100x1/365

32 Sep 30 By Balance c/d 532

3,832 2,09,600 2,832 2,09,600 Oct.1 Balance b/d 532

Calculation of no of days :

July Aug Sept Total July 1 to Sept. 30 31 31 30 = 92 July 15 to Sept.30 16 31 30 = 77 Aug.10 to Sept.30 - 21 30 = 51 Aug. 19 to Sept. 30 - 12 30 = 42 Sept. 3 to Sept. 30 - - 27 = 27 Sept. 16 to Sept. 30 - - 14 = 14

8.6.3. Index Number Method Illustration :3. The following transactions took place between Ram and Krishna from 1-1-2007 to 30-06-2007. Rs. Jan.1 Sold goods to Ram, 2,240 Jan 10 Received Ram’s acceptance at 2 months 1,000 Feb. 15 Received cash from Ram 1,200 Mar. 2 Bought goods from Ram 5,500 Mar 3 Accepted Ram’s bill at 1 month 2,000 Apr.11 Paid cash to Ram 2,000 Apr. 30 Sold goods to Ram payable up to 31 st May 2,400 May 11 Bought goods from Ram 1,500 May 31 Sold goods to Ram payable up to 10 th June 2,200 June 15 Bought goods from Ram 3,000

Prepare the account current to be sent by Krishna on 30 th June 2007. The rate of interest is 5%.



141 Solution :

In the Books of Krishna Ram is Account Current with Krishna as on 30-06-2007

Date 2007

Particulars Amount

Rs. Products

Date 2007

Particulars Amount

Rs. Products

Jan.1 To Sale 2,240.00 4,03,200 Jan 10 By B/R 1,000.00 1,09,.000.00 Mar.3 To B/P 2,000.00 1,70,000 Feb.15 By Cash 1,200.00 1,62,000 Apr.11 To Cash 2,000.00 1,60,000 Mar.2 By Purchases 5,500.00 6,60,000 Apr.30 To Sales 2,400.00 72,000 May.11 By Purchases 1,500.00 75,000 May.31 To Sales 2,200.00 44,000 June 15 By Purchases 3,000.00 45,000 June30 To Balance 2,01,800 June 30 By Interest 27.64 2,01,800x 5/100x1/365. June 30 To Bal. c/d 1,387.64 12,227,64 10,51,000 12,227.64 10,51,000

July 1 By Balance b/d 1,387.64

Illustration : 4. Balaji had the following transactions with Ganesan for the year 2007 Rs. Jan.20 Sold goods to Ganesan 400 Mar.2 Purchased goods from Ganesan 250 Mar.3 Accepted Ganesan’s draft at 1 month due 200 Apr.11 Cash paid to Ganesan 400 Apr.30 Goods sold to Ganesan due end of May 100 May 11 Bought goods from Ganesan 300 June 11 Balaji drew a bill on Ganesan this day. Payable two months after

date, and this was duly accepted by Ganesan

300 Prepare an Account current to be rendered by Balaji to Ganesan as at 30 th June, bringing interest into account at 20% p.a.

Solution : In the Books of Balaji

Ganesan in Account Current with Balaji as on 30-06-2007 Date 2007 Particulars

Amount Rs. Products

Date 2007 Particulars

Amount Rs. Products

Jan.20 To Sales 400.00 64,400 Mar.2 By Purchases 250.00 30,000 Mar.3 To B/P 200.00 17,000 May 11 By Purchases 300.00 15,000 Apr.11 To Cash 400.00 32,000 June11 By B/R 300.00 -13,500 Apr.30 To Sales 100.00 3,000 June30 By Balance - 84,900 June30 To Interest 46.52 June30 By Bal.c/d 296.52 84,900 x 20/100x1/365. 1,146.52 1,16,400 1,146.52 1,16,400 July 1 To Balance b/d 296.52

Note : Red Interest days = -45

8.6.4. Backward Method Illustration:5. On 1 st January 2007, Prem owed Rs. 5,400 to Kamal. Prepare an Account Current to be rendered by Kamal for the period up to 30 th June 2007. The following transactions have taken place between them during the period of six months.

Rs. Jan.1 Sold goods to Prem 800 Jan.16 Received form Prem 2,000 Jan.25 Sold to Prem, goods on credit for one month 1,000 Feb.10 Received three months acceptance from Prem 2,000 March 1 Bought goods to Prem 1,500 April 20 Sold goods to Prem 500 May.7 Prem bought goods 1,200



June 9

Remitted by Prem

142

800 June 14 Received form Prem 900

Interest is to be charged at an agreed rate of 6% p.a

Solution. Calculation of days : Jan Feb March April May June Total Jan 1 to Jan 1 0 0 Feb.25 to Jan.1 31 + 25 56 March 1 to Jan 1 31 + 28 + 1 60 April 20 to Jan.1

31 + 28 + 31 + 20 + 110

May 7 to Jan 1 31 + 28 + 31 + 30 + 7 127

May 13 to Jan1` 31 + 28 + 31 + 30 + 13 133

June 8 to Jan 1 31 + 28 + 31 + 30 + 31 + 8 159

June 14 to Jan 1 31 + 28 + 31 + 30 + 31 + 14 165

June 13 to Jan 1 31 + 28 + 31 + 30 + 31 + 30 181

8.6.5. Periodic Balance Method Illustration :6. Mr. Mohan opened a current account with the Indian Bank on 1 st January 2007 and deposited Rs. 7,000. His deposits during the period were.

Jan 25 Rs. 1,500 April 15 Rs. 2,500 May 26 Rs.800 June 20 Rs. 2,000

His withdrawals were: Jan 20 Rs. 4,000 Feb 10 Rs. 3,000 March 5 Rs. 2,000 May 20 Rs. 1,800 June 8 Rs. 2,750

Calculate interest @ 10% p.a on the customer’s debit balances and 6% p.a on credit balances and close the account on 30 th June 2007. Solution

Mr. Mohan in Account Current with the Indian Bank

Date 2007

Particulars Deposit Withdrawals Dr/Cr. Balance Days Dr.

Balance Cr.

Balance Rs Rs. Rs

Jan 1 By cash 7,000 - Cr. 7,000 19 - 1,33,000 Jan 20 To Cheque - 4,000 Cr. 3,000 5 - 15,000 Jan 25 By Cash 1,500 - Cr. 4,500 16 - 72,000 Feb10 To Cheque - 3,000 Cr. 1,500 24 - 36,000 Mar 5 To Cheque - 2,000 Dr. 500 41 20,500 - Apr15 By Cash 2,500 - Cr. 2,000 35 - 70,000

May20 To Cheque - 1,800 Cr. 200 6 - 1,200 May20 By Cash 800 - Cr. 1,000 13 - 13,000 June8 To Cheque - 2,750 Dr. 1,750 12 21,000 - Jun20 By Cash 2,000 - Cr. 250 10 - 2,500 Jun30 To Interest 86.83



Jun30

To Balance

336.83

143

13,886.83 13,886.83 41.500 3,42,700

Interest = 3,42,700x10/100x1/366. – 41,500x6/100x1/366. = 93.63-6.80 = 86.83

8.7. Let Us Sum Up : In this lesson we have discussed meaning and scope of account current and the procedure for

preparation of account current under different situations followed by sufficient number of unsolved problems.

8.8. Lesson End Activities : 8.8.1. Interest table Method: Exercise:1. On 1-1-2007 Ramesh owed Rs. 6,000 to Umesh on account, During the six months ended 30-06-2007, the transactions were as follows in the books of Umesh. Rs.

Jan .1 Goods sold to Ramesh Rs 3,000 Feb.1 Amount received from Ramesh Rs. 6,000 Mar.1 Goods sold to Ramesh Rs. 12,000 Apr. 1 Goods Purchased from Ramesh Rs.4,500 May 1 Goods sold to Ramesh Rs. 15,000 May 1 Cash received from Ramesh Rs. 6,000 June 1 Goods purchased from Ramesh Rs. 7,500 June 30 Cash received form Ramesh Rs. 3,000

Prepare Account current to be rendered to Ramesh on 30-06-2007. Interest to be calculated at 18% p.a in months. 8.8.2. Product Method Exercise:2. Prepare account current for Nagesh in respect of the following transactions with Basha: up to 1 st February 2007 at 6% p.a. Rs.

Sep.16 Goods sold to Basha 400 due 1 st Oct. Oct.1 Cash received from Basha 180 Oct. 21 Goods purchased from Basha 1,000 due 1st Dec. Nov.1 A paid to Basha 660 Dec.1 Paid to Basha 600 Dec.5 Goods purchased from Basha 1,000 due 1 st Jan. Dec.10 Goods purchased from Basha 440 due 1 st Jan. 2008 Jan 1 Paid to Basha 1,200 Jan.9 Goods sold to Basha 40 due 1 st Feb.

8.8.3. Index Number Method Exercise : 3. The following transactions took place between Sohan and Mohan during 2007.

Rs Jan 1 Sold goods to Sohan 1,120 Jan 20 Received Sohan’s acceptance due after 2 months. 500 Feb 15 Received cash from Sohan 600 Mar 2 Bought goods from Sohan 2,750 Mar 3 Acceptanced Sohan’s Bill due after one month 1000 April 11 Paid cash to Sohan 1000



April 30 Sold goods to Sohanpayable on 31st May . 1,200 May11 Bought goods from Sohan 750 May 31 Sold goods to Sohan payable on 10 th June. 1,100 June 15

Bought goods from Sohan

144

1,500 Prepare the Account Current to be sent by Mohan on 30 th June 2007. The rate of interest is 10%.

8.8.4. Backward Method Exercise : 4. The following are a series of transactions between Anbu and Balu for the three months ending on 31-3-2007. Calculate the amount of interest to be paid to one party to the other at 10% p.a., using the époque method.

01-01-2007 Balu’s opening Balance Dr.. 10,000 10-01-2007 Sold Goods to Balu 20,000 15-01-2007 Cash received from Balu 20,000 15-02-2007 Sold Goods to Balu 20,000 01-03-2007 Cash received from Balu 10,000

8.8.5. Periodic Balance Method Exercise : 5. From the following prepare an Account current by A to B charging interest on debits @ 12% and on credits @ 8% p.a.

Rs. 2004 Jan. 1 Balance due from B 600 10 Sold goods to B 520 17 B returned goods 125 Feb.10 B paid by cheque 400 14 B accepted A’s draft for one month 300 April. 29 Goods sold to B 615 May.15 Received cash from B 700 June. 5 B accepted A’s Bill for 3 months 500

8.9. Model Answers to Check your Progress : Exercise :1. Interest Amount Rs. 1035 Balance Amount Dr. Rs. 10,035

Exercise :2. Interest amount Rs.9.13 Balance Amount Dr. Rs. 289.13

Exercise :3. Interest Amount Rs. 27.65 Balance Amount Cr. Rs. 707.65

Exercise :4. Interest Amount Rs. 433 Balance Amount Dr. Rs.20,433

Exercise :5. Interest Amount Rs. 23.10 Balance Amount Cr. Rs.235.48

8.10 References: Financial Accounting – R.L. Gupta – Sultan chand & Sons Advanced Accounting – S.N. Mageswari – Vikas Publishers



144A

LESSON 9

CONSIGNMENT Contents : 9.0. Aims and Objectives 9.1. Introduction 9.2. Meaning 9.3. Need 9.4. Important Terms 9.5. Accounting Treatment 9.6. Illustrations 9.7. Let Us Sum Up 9.8. Lesson End Activities 9.9. Model Answers to Check your Progress 9.10 References 9.0. Aims and Objectives : In this lesson we are going to discuss

· meaning and need for consignment

· important terms relating to consignment

· valuation of closing stock

· journal entries in the books of consignor

· journal entries in the books of consignee

· additional journal entries in the case of invoice price method

· treatment of normal loss

· treatment of abnormal loss

· preparation of account sales

· ledger accounts in the books of both parties on the cost price method

· ledger accounts in the books of under invoice price method

· ledger accounts in the books of under memorandum method.





145

9.1. Introduction:

In these days of mass production, manufacturers and wholesalers have to promote their sales by all possible ways. Thus sales are made directly or indirectly. In the case of direct sales businessmen or manufacturers appoint salesman and they sell the goods. As such, all sales are under the control of the businessmen or the manufacturers. On the other hand, in indirect sales, the manufacturer or a wholesaler appoints an agent on commission basis. The manufacturer dispatches goods to him, who sells the goods. This system of indirect selling is known as consignment system. The accounting relations to consignment transactions are called Consignment Account.

9.2. Meaning:

Consignment is an agency arrangement under which the manufacturer or the wholesaler sends his goods at his own risk to his agent in a different place for the purpose of sales on commission basis. The person who sends the goods is known as the Consignor or the Principal. The ownership of the goods remains with the consignor. The person to whom the goods sent for sales is known as the Consignee or the Agent. Sending of goods from consignor to consignee is known as Consignment and the goods so sent are termed as Goods Sent on Consignment. The sender is the consignor and the receiver is the consignee. Sending of goods by the consignor is Outward Consignment and to the consignee it is an Inward Consignment. 9.3. Need for Consignment:

i. The manufacturer does not know the local condition of the market to sell his goods. Hence he appoints agents on commission basis in different places to sell his goods. As a local man, the agent will sell more goods, very easily.

ii. New goods to the market can also be sold by an agent who knows the market condition. He will take initiative to sell the goods by doing the necessary promotional work for the product.

iii. It is very expensive for the manufacturers to sell the goods directly. It is economical to send the goods on consignment to the agent for selling them.

iv. The products of the manufacturers can be sold in foreign countries by sending the goods to an agent who is in that country. It is also economical to the manufacturer.

9.4. Important terms:

i. Proforma Invoice: When the consignor sends the goods to the consignee, he forwards a statement showing the particulars of goods such as quality, quantity, price, markings, packing etc., and their statement is called the Proforma Invoice. But in case of regular sale, an invoice is prepared and sent along with the goods. It implies that a sale has taken place.

ii. Non- Recurring & Recurring Expenses: Consignor and Consignee have to incur some expenses for des patching and selling the Goods. These expenses of consignment are of two types: Non- Recurring Expenses and Recurring Expenses.

146 a. Non-recurring Expenses: Non-recurring expenses are incurred for bringing the goods from the place of the consignor to the place of the consignee. Hence, all the expenses incurred till the goods reach the godown of the consignee are non-recurring expenses. These



expenses are incurred only once on a particular consignment. It will increase the value of goods. These expenses are paid by the consignor or by the consignee on behalf of the consignor. b. Recurring Expenses: These expenses are incurred after the goods have been received at consignee’s gowns. These expenses are incurred quite often and of recurring in nature. These expenses occur regularly at fixed intervals. Generally these expenses are incurred after the goods have reached the place of business by consignee. It is met by the consignor or consignee. These expenses do not increase the value of goods. iii. Advance: Sometimes, consignor may ask the consignee to pay an advance for the part of the value of goods consigned. Consignee may send the advance in the form of a draft or cheque. If the consignee is not in a position to advance money, a Bill may be drawn on consignee. Consignor discounts the Bill and gets the money. The amount of discount on the Bill may be debited to Consignment Account or debited to Discount Account. Advance given by the consignee will be deducted from the sale proceeds.

iv. Account Sales : Periodically or when the goods consigned are sold by the consignee, The consignee will sent to the consignor a statement, which is called Account Sales, showing The amount received by way of sale of goods, expenses incurred, commission charge, advance payment and balance due to the consignor and the stock still in hand. From the Account Sales, The consignor closes her entries in the books regarding the consignment for that year. He can ascertain the profit or loss resulting from the transactions. Following is the specimen of an Account sales. v. Commission: Consignor pays commission to Consignee for selling his goods. Commission is generally calculated at fixed percentage of total sales as per terms laid by The Consignor. These commissions may be simple, or ordinary, special or over-riding and del credere. Ordinary commission is calculated as per terms laid down by the consignor. Generally it is calculated on the basis of total sales. Special commission is paid to give further incentive for increasing the sales. Over-riding commission is paid to consignee when she overrides the specified amount of sales. The commission is also calculated on total sales.

vi. Del Credere: The consignee is not expected to sell the goods on credit. However, the consignee has the right to sell the goods on credit, if consignor permits him to do so. Again if consignee makes credit sales and if there incurs any loss by way of bad debts, then such loss should be born by the consignor. To avoid such a loss, extra commission is given to the consignee, who is responsible for any bad debts. This extra commission is called Del Credere commission. It is given for taking risk in credit sales. In such cases, consignor receives the gross sale proceeds, whether recovered or not. This is generally calculated on total sales. Sometimes, del credere commission is restricted to credit sales only. In that case it is calculated only on credit sales.



147 9.5. Accounting treatment: 9.5.1. Valuation of Unsold Stock at cost price.:

If all goods are not sold by the Consignee within the accounting period, then the sun sold stock is brought into account by the Consignor. As usual, the unsold stock in the hands of the consignee should be valued on cost price or market price whichever is less. The cost means the cost at the moment when the goods reached the Consignee’s go down. The cost includes by adding proportionate non-recurring expenses incurred by the consignor as well as the consignee. It is calculated as follows:

(a) The proportionate cost price and (b) Proportionate direct expenses i.e. the expenses incurred by he Consignor and

Consignee till the goods reached the godown of the Consignee.

Expenses incurred by the Consignee after the goods have been brought to the shop or

godown are not considered. Correct profit or loss can be ascertained by the proper valuation of unsold stock which is credited to Consignment Account.

Value of unsold stock = Cost Price of Closing Stock + Proportionate non-Recurring Expenses. 9.5.2. Journal entries in the books of Consignor: 1. When the goods are sent on consignment: Consignment Account Dr. To Goods Sent on Consignment A/c 2.When expenses are incurred by the Consignor: Consignment Account Dr. To Bank/Cash Account 3.When the advance is received from Consignee: Cash /Bank/ Bill Receivable Account Dr. To Consignee Account 4.When The Bills is discounted by the Consignor with his banker: Bank Account Dr. Discount Account Dr. To Bills Receivable A/c

5.When the gross sales proceeds are reported by the Consignee: Consignee Account Dr. To Consignment Account

6.For expenses incurred by the Consignee: Consignment Account Dr. To Consignee Account



148 7.For commission payable to the Consignee: Consignment Account Dr. To Consignee Account 8.For unsold stock remaining with the Consignee: Consignment Stock Account Dr. To Consignment Account 9.For transferring the profit or loss to Profit and Loss A/c For Profit:

Consignment Account Dr. To Profit and Loss Account

For Loss: Profit and Loss Account Dr. To Consignment Account

10. For settlement of account by the Consignee: Bank/Cash/Bill Receivable Account Dr.

To Consignee Account 11.When goods sent on Consignment account is closed: Goods sent on Consignment Account Dr. To Trading/Purchases Account 9.5.3. Journal Entries in the Books of Consignee:

1.When the goods is received: No entry

2.When expenses are incurred by the Consignee: Consignor Account Dr.

To Bank Account

3.Advance remitted to Consignor by Cash/Cheque/Bills Payable

Consignor Account Dr. To Cash/Bank/Bills Payable A/c

4.When Consignee sold the goods: For cash sales: Bank Account Dr. To Consignor Account

For credit sale: Consignment Debtors Account Dr.

To Consignor Account



149 5.When the commission is due: Consignor Account Dr.

To Commission Account

6.When The Consignee collected the debt from Consignment Debtors: Bank Account Dr. To Consignment Debtors A/c 7.For bad debts if any:

i. If Del Credere Commission is not paid: Consignor Account Dr. To Debtors Accounts

ii. If Del Credere Commission is paid: Bad Debts Account Dr. To Consignment Debtors A/c

iii. Bad debts is transferred to her Profit & Loss Account Del Credere Commission Account Dr. To Bad Debts Account

8.Settlement of Account with Consignor: Consignor Account Dr. To Cash/Bank/Bill payable A/c

9.5.4. Invoice Price Method:

The Consignor, instead of sending the goods on consignment at cost price, may send it at a price higher than the cost price. This price is known as Invoice price or Selling Price. The difference between the cost price and the invoice price of goods is known as loading or the higher price over the cost. This is done with a view to keep the profits on consignment secret. As such, consignee could not know the actual profit made on consignment. Hence the consignor sends the Proforma Invoice at a higher price than the cost price.

When there is any stock remaining unsold, it is also valued at the invoice price plus proportionate direct expenses incurred or market price whichever is lower under this method. Once the stock on consignment is valued at the invoice, it is but natural the value of the same should be brought down to the cost as otherwise the Consignment Account will not reveal the correct profit or loss. For this purpose, the Consignment Account is debited with the difference between the invoice price and the cost of the unsold stock and the corresponding credit is given to a new account called Consignment Stock reserve Account.

When she consignor records the transaction in her book at invoice price, some additional entries have to be passed in order to eliminate the excess price and to arrive at the correct profit or loss on consignment. Excess Price or Loading is to be calculated on the following items:

i.To remove the excess price in the opening stock: Consignment Stock Reserve A/c Dr. To Consignment Account

ii.To remove the excess price in the goods sent on consignment: Goods sent on Consignment Account Dr.

To Consignment Account

iii.To remove the excess price in goods return: Consignment Account Dr. To Goods Sent on Consignment A/c



150 iv.To remove the excess price in closing stock: Consignment Account Dr. To Consignment Stock Reserve A/c

9.5.5. Normal Loss:

When goods are lost or damaged due to normally expected but unavoidable causes such as losses due to evaporation, leakage, breakage, dusting, weightment, drying, sublimation of goods etc. These losses are called Normal Losses. These types of losses cannot be avoided. Such inherent and unavoidable losses form part of the cost of goods. That is the loss on account of normal loss is borne by good units. When calculating the cost of unsold stock, this normal loss is to be considered. The cost of unsold stock increases proportionately due to normal loss. When there is normal loss the following formula is used for calculating the consignment stock:

Cost of goods sent + total non - recurring expenses Value of Closing Stock= x Closing stock

Units of goods sent – normal loss units in units

The normal loss is not shown in the consignment account. There is no need to pass any entry in the books of account.

9.5.6. Abnormal Loss:

When loss or damage of goods is caused by unnatural and unexpected reasons, then such loss is treated as abnormal loss. It is unexpected loss and beyond the control of the human beings. Loss of goods due to fire, flood, earthquake, war, theft, accidents in transit etc. are abnormal losses. Such losses occur because of bad luck, due to accident, mischief by someone or human carelessness.

Abnormal loss is calculated just like the unsold stock on consignment and credited to consignment account and debited to Abnormal or Accidental Loss Account and then transferred to General Profit and Loss Account, so as to arrive at the correct profit or loss of consignment. This is because abnormal loss has nothing to do with the particular consignment. Some businessmen take insurance policy in respect of the goods sent or received on consignment by the consignor or the consignee. Such a policy is obtained only in respect of abnormal loss which may be caused to the goods. If the insurer is liable for the loss, then the amount of claim admitted by the insurer should be debited to the insurer and balance of the loss should be debited to Profit and Loss Account.

The journal entries are:

i. When the Loss is Irrecoverable:

a. Abnormal Loss Account Dr. To Consignment Account b. Profit and Loss Account Dr. To Abnormal Loss A/c

ii.When the Loss is insured and full amount is recoverable:

a. Abnormal Loss Account Dr. To Consignment Account b. Insurance Company Account Dr. To Abnormal Loss Account



151 iii . When the Loss is partly recoverable :

a. Abnormal Loss Account Dr. To Consignment Account

b. Insurance Company Dr. Profit & Loss Account Dr. To Abnormal Loss Account

9.5.7. Memorandum Column Method:

Memorandum Column Method is a combination of Cost Price Method and Invoice Price Method. Under This method; there are two columns on each side of the consignment account. These two columns are used to record both cost and invoice prices of goods sent on consignment, opening stock, closing stock etc. The extra column used to record invoice price are known as Memorandum Column. Hence, the method is called Memorandum Column Method. From the accounting point of view it is not important. It is provided to know and show the profit if the consignments are recorded at invoice price.

9.6. ILLUSTRATIONS

9.6.1. Preparation of Account Sales:

Illustration: 1. Prepare an Account Sales from The following details: Consignor : Anitha Consignee : Anandhi Sales : 100 T.V. Sets at Rs. 4,500 each Expenses of consignee : Wages Rs. 200, Freight Rs. 6,000, Insurance : Rs. 1,800 Date : June 5, 2007 Commission : 5% on sales Advance paid : Rs. 1, 50,000. Balance : Remitted by Bank Draft.

Solution:

Account Sales

Particulars Rs. Rs. 100 T.V. Sets @ Rs. 4,500 each Less : Expenses and commission : Wages Freight Insurance Commission 5% on Sales Less : Advance Balance Due Bank Draft enclosed herewith for the balance.

200 6,000 1,800

22,500

4,50,000 30,500 4,19,500 1,50,000

2,69,000

9.6.2. Cost Price Method: Illustration: 2. Brindha of Cuddalore sends 40 cases of Hosiery Goods worth Rs. 20,000 to Bhavani of Erode to be sold on consignment basis on 1 st April 2007. Brindha pays Rs. 500 towards freight charges. The goods are received by Bhavani and she accepts a bill drawn on him by Brindha at 3 months, for Rs. 10,000 on 5 th April 2007. The bill was discounted on the next day by Brindha at 6% per annum. On 5 th July 2007, Bhavani sends an Account Sales to Brindha showing that sales of the entire stock has been effected totaling Rs. 24,800.



152 Her expenses are: Godown rent Rs. 500 and Insurance Rs. 250. Bhavani is entitled to a commission of 6% on sale proceeds. Bhavani sent a bank draft for the balance due to Brindha and settled her account. Pass journal entries and show ledger accounts in the books of Brindha

Solution: In the books of Brindha Consignor. Journal Entries

Date Particulars Rs Dr. Rs. Cr. 1.04.07 Apr.

Consignment A/c Dr. To Goods sent on Consignment A/c The cost of goods sent to Bhavani of Cuddalore to be sold on our account.

20,000 20,000

1.04.07

Consignment A/c Dr. To Bank A/c The amount of expenses incurred by us.

500

500

5.04.07

Bills Receivable A/c Dr. To Bhavani The receipt of acceptance from Bhavani as advance against consignment.

10,000

10,000

6.04.07

Bank A/c Dr. Discount A/c Dr. To Bills Receivable A/c The bill discounted at 6% with the bank.

9,850 150

10,000

5.07.07 Bhavani Dr. To Consignment A/c The sale proceeds of goods sent on consignment as per A/c received from Bhavani.

24,800

24,800

5.07.07 Consignment Dr. To Bhavani The amount of expenses incurred by Bhavani on selling The goods.

750

750

5.07.07

Consignment A/c Dr. To Bhavani The commission payable at 6% on sales effected.

1.488

1,488

5.07.07

5.07.07

Bank A/c Dr. To Bhavani The receipt of balance from Bhavani.

Consignment A/c Dr. To Profit & Loss A/c The transfer of profit on consignment to Profit & Loss A/c.

12,562

2,062

12,562

2,062



5.07.07

Goods sent on Consignment A/c Dr. To Purchases A/c The transfer of The value of goods sent on consignment to Purchases A/c.

20,000

153

20,000

Illustration: 3. Chidambaram consigns 100 radiograms to Chandru. Each radiogram costs Rs. 800. Chidambaram pays the following expenses:

Freight 1,000 Insurance 400 Carriage 500

Chandru pays the following expenses:

Customs duty 2,000 Dock dues 500 Godown rent 500 Salary to salesman 500

Goods reach the godown of the consignee. At the end of the year, 25 radiograms remained with Chandru. The market value of each radiogram is Rs 850. You are required calculating value of stock lying with Chandru.

Solution: Calculation of Value of Closing Stock

Cost of goods 25 x800. Add: Proportionate non recurring expenses By consignor Freight Insurance Carriage By consignee Customs Duty Dock dues

250.00 100.00 125.00 500.00 125.00

20,000.00 1,100.00 21,100.00

ii. At market price: 25 x 850 = Rs.21,250/-

The closing stock is to be valued at cost price or market price which ever is lower. Therefore, the value of closing stock shall be Rs. 21,100/-

Illustration: 4. A consigned 2,000 tonnes of coal @ Rs 50 per tonne to B of Delhi. He paid Rs 20,000 as freight. Due to normal wastage only 1,950 tonnes were received by B. He also paid Rs 5,000 as unloading and cartage charges. The goods unsold amount to 650 tonnes. You are required to calculate the value of closing stock.

Solution: Calculation of value of closing stock Units Amount Cost of goods 2,000 1,00,000



154 Add : Proportionate non recurring expenses by consignor - 20,000

2,000 1,20,000 Less: Normal Loss 50 -

1950 1,20,000

Add: Proportionate non recurring expenses by consignee - 5,000

Value of total goods 1,950 1,25,000 Value of closing stock= 1,25,000/1950 x 650 = Rs. 41,667/- Illustration: 5. A consigned to B 100 cases of tea costing Rs 100 per case. He paid Rs. 1,000 as freight and cartage. B could take deliver of only 90 cases since 10 cases were lost in transit. She paid Rs. 2,000 as unloading and carriage charge. At The end of the year she reported that she has sold away 80 cases at Rs 150 per case. You are required to calculate. i. The value of abnormal loss and ii. The value of closing stock.

Solution:

i. Calculation of value of abnormal loss and closing stock

Units Amount

Cost of goods 100 10,000 Add : Proportionate non recurring expenses by consignor - 1,000

100 11,000 Less: Normal Loss not given. - -

100 11,000 Less : Abnormal Loss 11,000/100 x10 . 10 1,100

90 9,900

Add: Proportionate non recurring expenses by consignee - 2,000

Value of total goods 90 11,900 Value of closing stock= 11,900/90x 10 = Rs. 1,322/-

Illustration: 6. A consignment of 10,000kg of tea, costing Rs 50 per kg sent on consignment on 1 st February 2007 to an agent, on commission of 5% on gross sales.The following expenses are incurred:

(a) By the Consignor : Freight and Insurance 2,000 Dock charges and Sundry Expenses 800

(b) By the Consignee : Godown Rent and Insurance 800 Miscellaneous Expenses 1,400

Some packages containing 2,000kg of tea were damaged in transit and the contents had to be destroyed on landing as having become unfit for sale. 7,000kg of tea were sold at Rs 60 and on 28 th February 2007. The date of closing of accounts, the balance of the consignment remained unsold in stock. Prepare necessary ledger Account.



155 Solution :

In The Books of Consignor Consignment Account

Consignee Account

To Consignment Account Sales.

Rs.

4,20,000 4,20,000

By Consignment A/c Godown Rent 800 Misc 1,400 By Consignment A/c By Balance c/d

Rs. 2,200 21,000 3,96,800

4,20,000

Working Note : Calculation of value of closing stock and loss of stock : Rs Cost of 10,000kg @ Rs 50 5,00,000 Add: Non-recurring Expenses: 2,800

Cost for 10,000kg 5,02,800

Value of closing stock = 5,02,800 /10000 x 100 = Rs 5,280 Value of loss of stock = 5,02,800 /10,000 x 2,000 = Rs 1,00,560 Illustration:7. Bharat Cycles of Calcutta consigned to Hindu Brothers 1,000 mini cycles at Rs 300 each. Bharat Cycles paid freight Rs 20,000 and insurance in transit Rs 3,000. During the transit 100 mini cycles were totally damaged by fire. Hind Brothers took delivery of the remaining cycles and paid Rs 1,530 for octroi.

Hindu Brothers sent a bank draft for Rs 1,00,000 as advance payment and later sent an Account Sales showing that 800 cycles were sold at Rs 400 each. Expenses incurred in

2007 Feb 1

Particulars To Goods sent on Consignment A/c To Bank Account Freight 2,000 Dock Charges 800

To Consignee Account Godown Rent 800 Misc Expenses 1,400

To Consignee Account Commission 4,20,000 x 5%. To Profit

Rs 5,00,000 2,800

2,200

21,000

44,840

5,70,840

2007

Particulars By Consignee Account Rs 7,000x Rs 60. By Abnormal Loss By Closing Stock

Rs.

4,20,000

1,00,560 50,280 5,70,840



156

godown rent and advertisement etc. amounted to Rs 4,000. Hind Bros. is entitled to commission of 5%. Prepare the Consignment Account. Accidental Loss Account and Hind Brothers Account in The books of Bharat Cycles of Calcutta, assuming that the claim from Insurance was settled for Rs 28,000.

Solution: In The books of Bharat Cycles

Consignment Account

Abnormal Loss Account


Rs. 32,300

32,300

By Consignment Account By Profit and Loss Account

Rs. 28,000 4,300

32,300

Hind Brothers Account


Rs. 3,20,000

3,20,000

By Consignment Account Octroi 1,530 Godown rent 4,000 By Bank Account By Consignment Account By Bank Account

Rs. 5,530 1,00,000

16,000

1,98,470

3,20,000 Working Note : i. Calculation of Abnormal Loss

Cost of 100 Bicycles @ Rs 300 30,000 Add: Non Recurring Expenses

Particulars Rs. Particulars Rs.

To Goods sent to Consignment To Bank Account Freight 20,000 Insurance 3,000 To Hind Brothers Account Octroi 1,530 Rent 4,000 To Hind Brothers Account Commission 3,20,000 x 5%. To Profit

3,00,000

23,000

5,530

16,000

40,240

3,84,770

By Hind Brothers A/c Sales.

By Abnormal Loss Account By Closing Stock Account

3,20,000

32,300

32,470

3,84,770



157 Freight 20,000 Insurance 3,000

23,000x1/10 2,300

32,300 ii. Calculation of value of closing stock

Cost of 100 Bicycles @ Rs 300 30,000 Add: Non Recurring Expenses Consignor23,000x100/1000. 2,300 Consignee 1,530x100/900. 170

32,470

Illustration: 8. Oswal Mills consigned 5,000 kgs oil to Vijay Dealers. Each kilogram of oil costs Rs 8. Oswal Mills paid Rs 50 as carriage. Rs 250 as freight and Rs 200 as insurance in transit. During transit 500 kg of oil were accidentally destroyed for which the Insurance paid, directly to the consignor Rs 2,500 in full settlement of the claim.

After three months from the date of the consignment of the goods, Vijay Dealers reported that 3,500 kg of oil was sold @ Rs 9.50 per kg and expenses being godown rent Rs 500, Salesmen salary Rs 750. Vijay Dealers are entitled to a 5% commission on sales. Vijay Dealers also reported a loss of 20kg of oil due to leakage. Prepare the necessary accounts in the books of the both the parties.

Solution:

In the books of Oswal Mills

Consignment Account

Particulars To Goods sent on Consignment To Bank Account : Carriage 50 Freight 250 Insurance 200 To Vijay Dealers Account : Godown Rent 500 Salesmen Salary 750

To Vijay Dealers Commission5%. To Profit

Rs. 40,000 500 1,250 1,663 1,860

45,273

Particulars By Vijay Dealers A/c Sales. By Bank A/c Insurance claim. By Abnormal Loss Account By Closing Stock Account

Rs. 33,250 2,500 1,550 7,973

45,273

Vijay Dealers Account

Particulars To Consignment Account

Rs 33,250

33,250

Particulars By Consignment Account Expenses By Consignment Account Commission By Balance c/d

Rs 1,250

1,663 30,337

33,250



158 In The books of Vijay Dealers Oswal Mills Account Particulars

To Bank Account - Expenses

To Commission Account

To Balance c/d

Rs 1,250

1,663

30,337

33,250

Particulars By Cash Account- Sales

Rs 33,250

33,250

Working Note : i. Calculation of value of Abnormal Loss Cost of goods 500 x 8. 4,000 Add : Non – Recurring Expenses 50+250+200.=500x500/5000 50 4,050 Less : Insurance claim 2,500 1,550 ii. Calculation of closing stock units Total units 5,000 Less : Abnormal Loss units 500 4,500 Less : Normal Loss units 20 4,480 Less : Sales units 3,500 980 iii. Calculation of value of closing stock Cost of goods 5000 x 8. 40,000 Add : Non – Recurring Expenses 50+250+200. 500 40,500 Less : Cost of Abnormal Loss 4,050 36,450 Value = 36,450x980/4480 7,973

9.6.3. Invoice Price Method

Illustration:9. Smith of Mysore consigned 100 machines costing Rs 50,000 to their agent Ashok of Chennai at 20% above the cost to be sold on behalf of Consignor. Consignor incurred Rs 50 for packing and other charges on each machine. Ashok received consignment by paying Rs 500 as railway charges and spent Rs 50 for carriage to godown. He rendered an Account Sales showing that:

20 Machines realised Rs 12,000 in each. 50 Machines sold on credit at Rs 650 each. 10 Machines taken to his own stock at Rs 610 each.

Consignee remitted the balance after deducting her commission at 5% on invoice price of goods sold and 15% on any excess price realised. Show the Consignment Account.



159 Solution :

In The books of Smith Consignment Account

Particulars

To Goods sent on Consignment To Bank Account - Expenses To Ashok Account: Railway Charges 500 Carriage to go down 50

To Ashok Account commission. To Stock Reserve 12,000-10,000.

To Profit

Rs 60,000 5,000 550

2,790 2,000

3,370

73,710

Particulars By Ashok Account Cash Sales 12,000 Credit Sales 32,500 Own use 6,100 By Closing Stock By G SC 60,000x20/120.

Rs 50,600

13,110

10,000

73,710

Working Note :

i. Calculation of value of closing stock Invoice price of machines @ Rs 600 12,000 Add: Proportions Expenses: Consignor @ Rs 50 on each machine 1,000

Consignee: 550 x 20 /100 110

13,110

ii. Calculation of amount of Commission Sales price of 80 machines by Consignee Rs 12,000 + 32,500 + 6,100. 50,600 Invoice price 80 machines @ Rs 600 48,000

Excess money realised 2,600 Normal Commission 48,000x5% . 2,400 Special Commission 2,600x15%. 390 2,790

Illustration:10. X consigns to Y 40 cases of goods at a cost of Rs. 5,000 per case. X incures the following expenses: Freight Rs 4,500, insurance Rs. 12,500 . Y paid cartage Rs 2,000 and rent Rs. 2,280. Four cases were destroyed by fire and a sum of Rs. 20,000 is recovered from the insurance company. Out of 36 cases 26 cases of goods were sold for Rs 6,000 each. Commission payable to Y is 5% on sales. Y sent the bank draft in full settlement of account. Give ledger accounts in the books of X.

Solution: In the Books of X Consignor.

Consignment Account Particulars Rs Particulars Rs

To Goods sent on Consignment A/c 40 cases x 5,000 each. To Bank: Freight 4,500 Insurance 12,500 To Y Account : Cartage 2,000

2,00,000 17,000

By Y Sales 26 x 6,000. By Abnormal Loss A/c By Consignment Stock A/c

1,56,000 21,900 54,750



Rent 2,280 To Y Account : Commission 1,56,000x5%.

To Profit

4,280 7,800 3,570 2,32,650

160 2,32,650

Y Account

Working Notes :

i. Calculation of value of Abnormal Loss: Cost of goods5,000x4. 20,000 Add : Non – Recurring Expenses Consignor 4,500+12,500=17,000x4/40. 1,700 Consignee 2,000 x 4/40. 200 21,900

ii. Calculation of value of closing stock : Cost of goods 5,000x10. 50,000 Add : Non – Recurring Expenses Consignor 4,500+12,500=17,000x 10/40. 4,250 Consignee 2,000 x 10/40. 500 54,750

Illustration:11. Ali of Kolkata sent a consignment of cotton goods to Osman of Delhi, invoiced at Rs. 1,00,000. The invoice price was made by adding 25% to the cost. The expenses incurred by Ali were: Packing Rs. 2,400, carriage etc. Rs. 1,600, Insurance Rs. 1,200 and other expenses Rs. 2,600. After three months he received Account Sales intimating that half of the consignment was sold at Rs. 60,000. The expenses incurred by the consignee were: Freight Rs. 3,000 fire insurance Rs. 1,800 and other expenses Rs. 1,000. His commission was 6% on sales and del credere commission 1 ½ %. But no sale could be made of the remainder so that it was brought back after another nine months at a further cost of Rs. 6,000 paid by Osman. The goods were damaged and valued at 20% below cost. Give necessary ledger accounts in the books of both the parties.

Solution: In the Books of Ail

Consignment Account

Particulars Rs Particulars Rs To Goods sent on consignment To Bank Expenses.:

1,00,000

By GSC Loading. 1,00,000 x 25/125.

20,000

Particulars Rs Particulars Rs To Consignment 26 x Rs. 6,000. 1,56,000

1,56,000

By Consignment A/c Cartage 2,000 Rent 2,280 Commission 7,800

By Bank

12,080 1,43,920

1,56,000



Packing 2,400 Carriage 1,600 Insurance 1,200 Others 2,600 To Osman Account Expenses.: Freight 3,000 Insurance 1,800 Others 1,000

To Osman Commission 60,000 x 7.5%.

To Osman Expenses. To Stock Reserve 40,000x25/125.

7,800 5,800

4,500 6,000 8,000 1,32,100

By Osman Sales. By Closing stock

By Loss

161 60,000 40,000 12,100

1,32,100

Osman Account

Particulars Rs Particulars Rs To Consignment Sales. 60,000

60,000

By Consignment Expenses. By Consignment Commission. By Consignment Expenses.: By Balance c/d

5,800 4,500 6,000 43,700

60,000

In the Books of Osman Ali Account

Particulars Rs Particulars Rs To Bank A/c Expenses. To Commission A/c To Bank A/c Expenses. To Balance c/d

5,800 4,500 6,000 43,700 60,000

By Bank A/c Sale. 60,000 60,000

Illustration:12. On 1 st January 2007, A of Delhi consigned to B of Amritsar goods for sale at invoice price. B is entitled to commission of 3 per cent on invoice price and 20 per cent of any surplus price realised. Goods costing Rs. 12,000 were consigned to Amristar at the invoice price of Rs. 14,400. The expenses of consignment amounted to Rs. 1,000. On 31 st March 2003, an Account Sales was received from B showing that she had effected sales of Rs. 12,000 in respect of 3/4 th of the quantity of goods consigned to him. His actual out of pocket expenses were Rs. 600. B accepted a bill drawn by A for Rs. 5,000 and remitted the balance due from him in cash. Prepare the necessary ledger accounts in the books of the consignor.



162 Solution:

In the Books of A

Consignment Account

Date 2003

Particulars Rs Date 2003

Particulars Rs

Jan. 1 Jan. 1 March 31

To Goods sent on consignment To Bank Expenses.

To B Account Expenses. To B Account Commission. To Stock Reserve To Profit

14,400 1,000

600 564 600

1,086

18,250

Mar 31

By B-Sales By GSC Loading. By Closing Stock

12,000

2,400

3,850

18,250

B Account

Good Sent on Consignment Account

Date 2007

particulars Rs Date 2007

Particulars Rs

Mar. 31 To Consignment Loading . To Trading A/c

2,400

12,000

14,400

Mar 31 By Consignment 14,400

14,400 Working Note: i. Calculation of commission Invoice price of good sold14,400x 3/4 . 10,800 Ordinary commission10,800 x3%. 324 Special commission 12,000-10,800= 1,200 x 20%. 240 564

ii. Calculation of value of closing stock Invoice price 14,400x 1/4 . 3,600 Add : Expenses 1,000 x 1/4 . 250 3,850

Date 2003

Particulars Rs Date 2003

Particulars Rs

Mar. 3 To Consignment Sales.

12,000

12,000

Mar. 31 By Consignment

By ConsignmentCom.

By B/R

By Bank

600

564

5,000

5,836

12,000



163 9.6.4. Memorandum Method :

Illustration: 13. Mr. Arun of Bombay consigned 500 toys to Ramesh. A Proforma invoice was prepared at Rs 40 per toy, the cost of which was Rs 35 per toy. Arun spent Rs 750 by way of forwarding charges including insurance premium of Rs 150. In transit 50 toys were destroyed and Ramesh received 90% of the cost price in full satisfaction of the claim with Insurance Company. Ramesh sold 400 toys at invoice price and spent Rs 300 for selling expenses. She deducted a commission at 20% on sales and paid the balance to Arun. Prepare Consignment Account and in the Accidental Loss Account in the books of Arun under Memorandum Column method.

Solution : In the books of Mr Arun Consignment Account

Particulars Invoice Price

Cost Price

Particulars Invoice

Price Cost Price

To G S C

To Bank Expenses.

To Ramesh Expenses.

To RameshCommission.

Rs

20,000

750

300

3,200

24,250

Rs

17,500

750

300

3,200

21,750

By Ramesh Sales. By Abnormal Loss By Closing Stock By Loss

Rs 16,000

2,075

2,075

4,100

24,250

Rs 16,000

1,825

1,825

2,100

21,750

Abnormal Loss Account

To Consignment Account Rs 2,075

2,075

Rs 1,825 1,825

By Cash 1750 x90%. By Profit & Loss A/c

Rs 1,575

500 2,075

Rs 1,575

250 1,825

Working Note : i. Calculation of value of closing stock Invoice Price Cost Price 500 toys @ Rs 40 20,000 500 toys @ Rs 35 17,500 Add: Non-recurring Expenses 750 750

For 500 toys: 20,750 18,250 For 50 toys: 2,075 1,825

Closing stock: 50 toys Abnormal Loss: 50 toys



9.7. Let Us Sum Up : In this lesson we have discussed meaning and need for consignment accounting solutions for consignments under different methods followed by sufficient numbers of unsoved problems. 9.8. Lesson End Activities : 9.8.1. Cost Price Method:

Exercise: 1. Mr. Ram Manohar of Bombay sent 100 bicycles, which cost Rs 900 each to Gopal of Madras on consignment basis. Ram Manohar paid freight of Rs 1,200, cartage Rs 300 and insurance Rs 400 in Madras, Gopal has spent Rs 100 as cartage, loading and unloading Rs 50. The bicycles have been kept on a godown at a monthly rent of Rs 100 p.m. At The end of accounting period, 20 bicycles remained unsold. The selling price of the bicycle is Rs 1,000 at Madras. Calculate value of closing stock.

Exercise: 2. Goods consigned 500kg @ Rs 20 per kg. Freight and Carriage paid by the consignor Rs 4,000. Consignee sold 300kg @ Rs 35 per kg and incurred Rs 1,000 as unloading expenses, Rs 2,000 as godown rent and Rs 1,000 as selling expenses. Normal loss due to leakage is 50 kg. Show how the loss and unsold stock will be treated in the books of the consignor.

Exercise: 3. Goods sent on consignment 1,000 kg @ Rs 10 per kg. Expenses paid by the consignor: Freight Rs 500 and Insurance Rs 300. 200kg were destroyed in transit due to an accident. Claim admitted by the Insurance Company was for Rs 1,500. The consignee sold 700kg @ Rs 20 per kg and incurred the following expenses: Unloading Rs 200, Godown Rent Rs 500 and Selling Expenses Rs 300. Calculate value of abnormal loss and closing stock.

Exercise: 4. Rathnasamy Mills of Coimbatore consign goods costing Rs 25,000 to their agent Ramof Chennai on which they pay freight, insurance and at other charges of Rs 1,500 drawing on him at 90 days Bill for Rs 20,000. They discount the Bill with a bank at a discount of Rs 150. After 3 months they receive from their agent an Account Sales informing that the entire consignment had been sold for Rs 35,000 that expenses amounting Rs 700 have been incurred and showing as a deduction they agreed commission of 2% on the amount realised. A draft on the bank was enclosed for the balance due. Show the journal entries and important ledger accounts in the books of both the parties.

Exercise: 5. Williams of Madras consigned 300 Bags of tea at 2,000 per bag to Johnson of New Delhi paying freight Rs 4,000 and other expenses Rs 2,000. Johnson sold 250 bags at Rs.2,500 per bag and 25 bags at Rs. 2,200 per bag. Johnson spent for freight and octori Rs. 3,000 and other expenses Rs 1,000. He remitted the amount due to Williams after deducting her commission at 5% normal. 2 ½ % Over-riding. and + 1/2 % Del credere commission to be given on total sales.. Johnson found that one customer to whom credit was allowed paid only Rs 4,800 against Rs 5,000 in full settlement. Other customers paid the amount due. Pass journal entries in the books of both parties and prepare ledger accounts.

Exercise: 6. A & Co. of Calcutta sent on consignment account goods to B & Co, of Bombay at an invoice price of Rs 29,675 and paid freight Rs 762, cartage Rs 232 and insurance Rs 700. Half the goods were sold by agents for Rs 17,500, subject to the agent’s commission of Rs 875, storage expenses of Rs 200 and other selling expenses of Rs 350. One fourth of the consignment was lost by fire and a claim of Rs 5,000 was recovered. Draw up the necessary accounts in the books of A & Co. and ascertain the profit or loss made on consignment. The consignor received a two months bill of exchange from the agents in satisfaction of the dues.



165 Exercise :7. Sri Mehta of Bombay consigns 1,000 cases goods costing Rs 100 each to Shri Sundaram of Madras. Sri Mehta pays the following expenses in connection with the consignment.

Rs

Carriage

1,000

Freight 3,000

Loading Charges 1,000

Sri Sundaram sells 700 cases at Rs 140 per case and incurs the following expenses

Rs Warehousing and Storage 850 Clearing Charges 1,700 Packing and Selling Expenses 600

It is found that 50 cases have been lost in transit and 100 cases are still in transit. Sri Sundaram is entitled to a Commission of 10 per cent on gross sales. Draw up the Consignment Account and Sundaram’s Account in the books of Sri Mehta.

Exercise: 8. 2,000 Shirts were consigned by Bhagwan & Company of Delhi to Shreyans of Tokyo at a cost of Rs 150 each. Bhagwan & Company paid freight Rs 20,000 and insurance Rs 3,000. During the transit 200 shirts were totally damaged by fire. Shreyans took delivery of the remaining shirts and paid Rs 28,800 as customs duty. Shreyans has sent a bank draft to Bhagwan & Company for Rs 1,00,000 as advance payment. 1,600 Shirts were sold by him at Rs 200 each. Expenses incurred by Shreyans on godown rent and advertisement etc. amounted to Rs 4,000. She is entitled to a commission of 5 per cent. A customer to whom the goods were sold on credit could not pay the cost of 10 Shirts. Prepare the Consignment Account and The account of Mr. Shreyans in his books of Bhagwan & Company. Shreyans settled his account immediately. Nothing was recovered from the insurers for the damaged goods. 9.8.2. Invoice Price Method Exercise: 9. Dinesh of Bombay consigned medicines of Rao of Madras costing Rs 1,00,000. The invoice was made proforma so as to show a profit of 25% on cost. Dinesh paid freight and insurance Rs 2,000. Rao sold part of consignment of Rs 88,000 at uniform price of 10% over invoice price and spent Rs 3,000 as warehouse charges and Rs 1,000 as selling expenses. Rao is entitled to a commission of 5% on sales and 20% of the net profit after charging such commission on sales. Rao paid the amount due by bank draft. Draw up the Consignment Account and Rao Account in the books of Dinesh.

Exercise:10. Roy of Calcutta sends 100 sewing machines on consignment to Malik at Patna. The cost of each machine is Rs 1,300/- but the invoice price is at the rate of Rs. 1,600/. Roy spends Rs 4,000/- on packing and despatch. Malik received the consignment and immediately accepts Roy’s Draft for Rs. 60,000/-. Subsequently Malik informs Roy that 80 machines have been sold at Rs. 1,750/- each including credit sales of 20 machines.. Expenses paid by Malik are: Freight Rs.3,600/- Godown Rent 1,500 and Insurance 3000. The account sales was accompanied by The necessary Bank Draft. Prepare the necessary accounts in the Books of Roy.



Exercise :11. Mopedes Ltd., Madras, forwarded on 1 st June 2007. 50 Mopedes to Mr. Pathak of Patna to be sold on its behalf. The cost of one Mopede was Rs. 1,600 but the

166 invoice price was Rs. 2,000. Mopedes Ltd., incurred Rs. 10,000 on freight and insurance. The consignment was received by Mr. Pathak on 10 th June 2007. He also sent a bank draft for Rs. 75,000 as advance against the consignment. Mr.Pathak also incurred Rs. 600 on godown rent and Rs. 1,400 on advertisements. On 10 th August 2007. Mr. Pathak sent an Account Sales stating that He had sold 45 Mopedes at a price of Rs. 2,150 each. He is also entitled to a commission of 5% gross sales. Pass journal entries to record the above transactions in the books of Mopedes Ltd., and Mr. Pathak, assuming that the balance due by Mr. Pathak is sent by bank on 31 st August 2007.

Exercise:12. Sundaram of Coimbatore Ltd, forwarded on 1 st Jan 2007 steel chairs to Naresh of Chennai .The cost of one steel chair was Rs. 250 but the invoice price was Rs. 300. Sundaram incurred Rs. 1,000 on freight and insurance and received Rs. 1,000 as an advance from Naresh. Naresh paid Rs. 500 as octroi and carriage, Rs. 400 as rent and Rs. 300 as insurance and 30 th June 2007 had disposed of 80 bicycles for Rs. 25,000. Naresh in entitled to a commission on sale at 5 percent on proforma invoice price and 25% of any Surplus price realised. Naresh remitted the amount due from by a bank draft. You are required to give the journal entries to record the above transactions in the books of the consignor and the consignee and also write up ledger accounts in the books of both the Parties. 9.8.3. Memorandum Method Exercise :13. On 1 st August 2007, Raman of Delhi consigned 200 radio sets to Balaji of Banglore. While the cost of each set was Rs. 300, Raman invoiced them at Rs.350 per set. Raman incurred Rs. 2,000 on freight and insurance on goods consigned. On 20 th December, 2007 Balaji sent an Account Sales to Raman stating that 135 sets have been sold at Rs 410 per set and 43 sets have been sold at Rs 360 per set. Two sets have been damaged in the godown and they have been sold for Rs. 100 per sent under instructions from the consignor. Balaji also incurred Rs.500 on godown rent and Rs. 2,000 towards salaries to salesmen. He is also entitled to a commission of 5% on gross sales including del credere commission of 2%. Show relevant ledger accounts in the books of both the parties, assuming that Balaji has remitted the balance due by bank draft along with Account Sales. 9.9. Model Answers to Check your Progress : Ex: 1. Cost price = 900 x 20 18,000 Add: N.R.E 1200 + 300 + 400 + 100 + 50 = 2050 x 20/100 410 Value of unsold Stock Rs. 18,410 Ex: 2. Cost price = 500 x 20 10,000 Add: N.R.E 4000 + 1000 5,000 15,000 Actual quantity = 500-50 450kg Value of unsold Stock = 15000 / 450 x 150 5,000 Note : No separate treatment is reared for Normal loss. Ex: 3. Cost price = 100 x 10 10,000 Add: N.R.E 500 + 300 800 10,800

167



Less: Abnormal Loss 10800 x 200/1,000 2,160

8,640

Add : N.R.E 200

8,840 Value of unsold stock 8,840 x 100 /800. 1,105

Ex: 4 Profit from consignment A/c 35,000 – 25,000 + 1,500 + 150 + 700 + 700. 6,950 G.S.C. A/c Balance 25,000 Consignee A/c Balance 25,000 – 20,000 + 700 + 700. 13,600 Ex: 5. Value of Closing stock = 50,000 + 9,000 / 300 x 25 50,750 Profit on consignment 6,80,000 + 50,750. – 6,00,000 + 6,000 + 4,000 + 54,400. 66,350 Consignee A/c Balance 6,80,000 – 4,000 + 54,400. 6,21,600 Ex: 6. Abnormal loss value 7419 + 424 = 7,843 – 5,000 2,843 Closing stock value 7419 + 424 7,843 Profit on consignment 17,500 + 7,843 + 7,843. – 29,675 + 762 + 232 + 700 + 875 +200 + 350. 392 Consignee A/c Balance 17,500 – 1425 16,075 Ex:7. Abnormal loss value = 100 + 5 = 105 x 50 5,250 Value of closing stock= 100 +5 = 105 x 100. + 105 +1 = 106 x 150. 26,400

Profit on consignment 98,000 + 5,250 + 26,400. – 1,00,000 + 5,000 + 3,150 + 9,800. 11,700 Consignee A/c Balance 98,000 – 3,150 + 9,800. 85,050 Ex: 8. Abnormal loss value = 200 x 150 = 30,000 + 23,000 x 200/2,000. = 2,300. 32,300 Value of closing stock = 200 x 150 30,000 + 23,000 x 200/2,000. + 28,800 x 200/1,800. 35,500

Profit on consignment = 3,20,000 + 35,500 + 32,300 – 3,00,000 + 23,000 + 28,800 + 4,000 + 6,000 + 2,000. 14,000

Consignee A/c Balance = 3,20,000 – 28,800 +4,000 + 16,000 + 2,000 + 1,00,0000. 1,69,200 Note : Bad debts of Rs 2,000 is included in consignment account as there is no provision for

Del credere commission Ex: 9. i.Value of closing stock Invoice value of goods sent 1,25,000 Less: Invoice value of goods sold 88,000 x 100 /110. 80,000

45,000 Add: N.R.E 45,000 x 2,000/ 1,25,000. 720

45,720 ii.Value of stock Reserve Invoice price 45,000

Less: Cost price 45,000 x 100/125. 36,000

9,000 168



Profit on consignment =88,000 + 25,000 + 45,720. – 1,25,000 + 2,000 + 4,000 + 4,400 + 9,000. 14,320

Consignee A/c Balance = 88,000 – 4,000 + 4,400. 79,180 Ex:10.

Value of closing stock Invoice value 20 x 1,600 32,000 Add : N.R.E 4,000 + 3,600 + 3,000 x 20/100. 2,120

34,120 Value of stock Reserve 300 x 20 6,000 Value of Excess profit 300 x 100 30,000

Profit on consignment = 1,40,000 + 34,120 + 30,000. – 1,60,000 + 4,000 + 3,600 + 1,500 + 3,000 + 8,400 + 525 + 6,000. 17,095

Consignee A/c Balance = 1,40,000 – 60,000 + 8,100 + 8,925. 62,975 Ex:11. Value of closing stock 11,000 Value of stock Reserve 2,000 Value of Excess profit 20,000 Profit on consignment = 96,750 + 11,000 + 20,000. – 1,00,000 + 10,000 + 2,000 + 4,838 + 2,000. 892 Consignee A/c Balance = 96,150 75,000 + 2,000 + 4,838. 14,912 Ex:12. Value of closing stock 6,000 + 300. 6,300 Value of stock Reserve 50 x 20. 1,000 Value of Excess Profit 100 x 50. 5,000 Profit on consignment = 25,000 + 6,300 + 5,000. – 30,000 + 1,000 + 1,200 + 1,450 + 1,000. 1,650 Consignee A/c Balance = 25,000. – 10,000 + 1,200 + 1,450. 12,350 Ex:13. Cost Price method Value of closing stock 6,200 Value of Abnormal loss 620 Profit on consignment = 70,830 + 620 + 6,200. – 60,000 + 2,000 + 2,500 + 3,546. 9,608 Consignee A/c Balance = 70,830 + 200. – 2,500 + 3,542 +10. 64, 978 Invoice Price Method Value of closing stock 10,000 Value of Abnormal loss 620 Value of Excess Profit 10,000 Value of stock Reserve 1,000

Profit on consignment = 70,830 + 620 + 7,200 + 10,000. – 70,000 + 2,000 + 2,500 + 3,502 + 1,000. 9,608

Consignee A/c Balance 64, 978 9.10 References : Financial Accounting – R.L. Gupta – Sultan chand & Sons Advanced Accounting – S.N. Mageswari – Vikas Publishers.



168A

LESSON 10

JOINT VENTURE

Contents : 10.0. Aims and Objectives 10.1. Introduction 10.2. Meaning 10.3. Features of Joint Venture 10.4. Benefits of Joint Venture 10.5. Joint Venture and Partnership 10.6. Joint Venture and Consignment 10.7. Accounting Treatment 10.8. Illustrations 10.9. Let Us Sum Up 10.10. Lesson End Activities 10.11. Model Answers to Check your Progress 10.12 References 10.0. Aims and Objectives : In this lesson we are going to discuss

· the concept of joint venture

· features of joint venture

· comparison of joint venture with partnership firm

· comparison of joint venture with consignment

· journal entries and ledger accounts under three methods.





169

10.1. Introduction : Some times a party may be in a position to buy goods at a lower cost than others. A second party may sell at an exceptionally good price. A third party may have financial resource but may not be in a position either to buy at lower-price or to sell at a higher price. A combination of all these parties in a common venture may result in successful and remunerative business. 10.2. Meaning: Joint Venture is a business where two or more persons agree to undertake jointly a particular venture. Joint venture is a particular partnership. Joint Venture is defined as the kind of business proposition where two or more persons jointly venture to complete a specific business undertaking on agreed conditions, to share the profit or losses arising there from, on a temporary partnership basis until its completion. A joint Venture is also known as Joint Adventure or Joint Trade. It is a temporary partnership. It has no firm name. Hence it is a partnership without name. the partners or in a joint venture are called the Co-venturer. They agree to contribute capital to carry on a particular job. The capital may be in cash or in kind with a view to share the profits or loss in an agreed ratio. If there is no agreement regarding the profit sharing ratio, they share the profits or losses equally, as in the partnership. As soon as the business is completed, the joint venture comes to an end. If a trader is in need of funds or business skill or wants to share the risk, he joints with other businessmen. Examples of such transaction are: a. Joint Consignment of goods b. Construction or contract businesses c. Purchase and sale of properties and stocks of liquidated business d. Underwriting shares or debentures of joint stock companies. e. Speculation in share etc. 10.3. Features of Joint Venture: The main characteristic features of a joint venture are as follows:

(i) It is an agreement between two or more persons. (ii) No specific name of the firm is necessary for a joint venture business. (iii) The object is execution of a specific work. (iv) The venturers share profits or losses in an agreed ratio, in the absence of any

agreement, it is assumed to be equal. (v) The Joint venture comes to an end as soon as the venture is completed, hence is

temporary in venture. (vi) The venturers may do any type of business of their own during the course of the

venture. 10.4. Benefits of Joint Venture : A joint venture business has the following benefits: i. Sharing of risk: The risk of the joint venture transaction is not to be born only by one person. It is shared in an agreed ratio because profits or losses of the transaction are shared in a pre-determined ratio. ii. Financial resources: Financial resources are collected by two or more persons in the joint venture transaction. Thus, adequate financial availability is possible to undertake relatively big projects requiring more capital. iii. Sufficient experience: More people can come together in a joint venture business having wide experience in a particular line. Thus, people of different skills and experience can come together to undertake costly and profitable projects and execute them efficiently.

170 10.5. Joint Venture and Partnership: Joint venture is not a partnership in strict sense though we call it a temporary partnership. It differs from partnership and its salient points are outlined below.



Joint Venture Partnership

1. There is no necessity for a trade name 1. The firm has a specific trade name 2. The parties in Joint Venture are known as Co-venturers.

2. The parties in partnership are known as partners.

3. The minimum number of Co-venturers are two and there is no limit for maximum

3. Minimum number is two and maximum number is ten in case of banking business and 20 in other business.

4. It is temporary in nature. It is formed for special purpose and it ceases to exist on completion of a particular business.

4. It is continuous business operation and it is not restricted to a particular operation.

5. The agreement is not registered in order to make it enforceable against the third parties.

5. It must be registered in order to make claim of partnership against the third parties.

6. Co-venturers are free to have their own independent business of the same type.

6. Partners cannot independently undertake business of similar nature.

7. The profit is ascertained for each venture. 7. The profit is ascertained annually. 8. Co-venturers have no implied authority. 8. Partners have implied authority. 9. There is no joint and several liabilities unless there is special agreement.

9. There is joint and several liabilities on partners.

10. There is no special Act for joint Venture. 10.There is a special Act known as Indian Partnership Act, 1932

11. It is not necessary to maintain separate and permanent record of account.

11.The firm must maintain a separate set of books of account on a permanent basis.

10.6. Joint Venture and Consignment Joint Venture and Consignment are different methods of doing business. If co-venturers consign goods to each other or to third parties, then such transaction can be called as Joint Consignment. It is different from consignment. The difference between Joint Venture and Consignment are:

Joint Venture Consignment 1. The parties are called co-venturers. 1. The parties are called Consignor or

Principal and Consignee or Agent. 2. The relationship between the co-venturers is like that of partners.

2. The relationship between the consignor and consignee is that of principal and agent.

3. It is a temporary partnership 3. It is not a partnership. The agent need not be a partner.

4. The profits or losses are shared equally or in agreed ratio.

4. The agent has no right to share the profits. But he receives commission.

5. All the Co-venturers have equal powers to buy and sell the goods, to collect the dues etc.

5. The agent does not have any power. He has to follow the principal’s orders.

6. Capital in cash or in kind is contributed by Co-venturers.

6. Here, capital in cash or in kind is contributed by consignor.

7. It ceases to exist when the specific business is completed by the Co-venturers.

7. It is continuing for any length of time as long as the relationship between the consignor and by consignee exists.

8. The business may be concerned with buying or selling or contract work or any other activities.

171 8. Consignments are meant for sale of goods alone



10.7. Accounting Treatment 10.7.1. Recording in Separate set of Books for Joint Venture: Under this method one of the ventures is entrusted to manager the joint venture and he maintains the accounts relating to the Joint Venture. The other Co-venturer only contributes their share of investment. The entries of the transactions are recorded by one person i.e. managing participant. in his books. He opens Joint Venture Account and other Co-venture’s Account. It is a complete record. The journal entries are. 1. When cash contributed or invested or paid in by Co-venturer Joint Bank Account Dr. To Respective Co-venturer Account 2. When goods purchased for joint venture Joint Venture Account Dr. To Joint Bank Account 3. When goods contributed by Co-venturer Joint Venture Account Dr. To Respective Co-venturer Account 4. When goods purchased on credit Joint Venture Account Dr. To Supplier’s Account 5. When suppliers are paid off Supplier’s Account Dr. To Joint Bank Account 6. When expenses incurred Joint venture Account Dr. To Joint Bank Account 7. When expenses paid by a Co-venturer Joint venture Account Dr. To Respective Co-venturer Account 8. When goods sold for cash Joint Bank Account Dr. To Joint venture Account 9. When goods sold on credit Debtor’s Account Dr. To Joint venture account

172 10. When cash received from debtors Joint Bank Account Dr. To Debtor’s A/c



11. When goods taken by Co-venturer Respective Co-venturer Account Dr. To Joint venture Account 12. When commission or salary payable to Co-venturer Joint venture Account Dr. To Respective Co-venturer A/c 13. When discount received from creditors Creditors Account Dr. To Joint venture Account 14. When discount allowed or bad debts incurred Joint venture Account Dr. To Debtor’s Account 15. When cash is paid to creditors Creditorse A/c Dr. To Joint Bank Account 16. When there is a profit Joint venture Account Dr. To Each Co- venturer Account 17. When there is a Loss Each Co-venturer Account Dr. To joint Venture Account 10.7.2. Recording In Each Party Books Individually: This account shows the profit of loss made on joint venture. It is nominal account Following are the journal entries under method:

1. When cash is contribute by Co-venturer:

Cash/Bank Account Dr. To Co-venturer Account

2. When goods is purchased on account of join venture: Joint Venture Account Dr. To Bank/Supplier’s Account

3. When goods supplied by other Co-venturer: Joint Venture’s Account Dr. To Co-venturer’s Account

4. When goods are supplied out of his stock: Joint Venture Account Dr. To Purchases Account

173

5. When expenses are met: Joint Venture Account Dr.



To cash Account 6. When goods are sold: Cash Account Dr.

To Joint venture Account

7. When goods are sold on credit: Customer’s Account Dr. To Joint venture Account 8. When expenses are met by other Co-venturer: Joint Venture Account Dr To other Co-venturer Account 9. When working or managing participant charges commission Joint Venture Account Dr To Commission Account Being commission given to participant 10. When unsold stock is taken over by participating Co-venturer: Purchases Account Dr To Joint Venture Account Being unsold goods taken back. 11. When unsold stock is taken by other Co-venturer: Co-venturer Account Dr To Joint Venture Account Being goods taken over by other Co-venturer. 12. When there is a profit: Joint Venture Account Dr To Profit and Loss Account To other Co-venturer Account Being profits on Joint venture. 13. When there is a loss: Profit and Loss Account Dr Other Co-venturer Account Dr To Joint Venture Account Being loss is transferred on joint venture. 14. When the final settlement is made Other Co-venturer Account Dr To Cash/Bank Account Being the final settlement made.

10.7.3. Memorandum Method: When all parties keep accounts, the method adopted for recording the transactions relating to joint venture, is called joint venture memorandum method. In order to prepare Memorandum Joint Venture Account, one Co-venturer sends another Co-venturer a copy, of the account kept by him. One the basis of the copydum Joint Vneture Account is just a combination of Joint Venture Accounts prepared by all the Co-venturers. The debit side of

174 the Joint Venture with B Account is put on the debit side of the Memorandum Joint Venture Account and credit side of that account is put on the credit side of the Memorandum Joint



Venture Account. That is, the transactions of personal accounts of all Co-venturers are entered in the Memorandum Joint Venture Account. Memorandum Joint Venture Account is just like a trading and profit and Loss Account. All the Co-venturer prepares the same Memorandum Joint Venture Account. The balance amount of Memorandum Joint Account shows either profit or loss on Joint Venture. The Co-venturer share the profit or loss in the agreed ratio.

(10.8) ILLUSTRATIONS 10.8.1. Recording in Separate set of Books for Joint Venture: Illustration :1. A, B and C enter into a joint venture to divide profits equally. They bought goods from D for Rs.12, 500 and from A for Rs.25, 000. A contributed Rs.30, 000, B Rs.40, 000 and C Rs.90, 000 which amounts were banked in a joint account. They settled their account with D by cheque and paid for carriage and other expenses Rs.7, 500. They sold goods for cash Rs.65, 000 and to E on credit for Rs.1, 40, 000 who accepted a draft for the amount. The acceptance was cashed and realizes Rs.1, 37, 000. A was allowed 5% commission on sales for effecting the transactions. Pass necessary journal entries and open accounts, assuming that the final settlement between parties was made by cheque. Solution : Journal Entries

Particulars Rs. Rs. 1. Joint venture account Dr. 1,50,000 To Dishonoured 1,25,000 To Account’s capital account 25,000 Being cost of goods purchased on credit. 2. Joint bank account Dr. 1,60,000 To A’s capital account 30,000 To B’s capital account 40,000 To C’s capital account 90,000 Being capital contributed by partners. 3. D Dr. 1,25,000 To Joint bank account 1,25,000 Being payment of carriage and expenses. 4. Joint bank account Dr. 7,500 To Joint bank account 7,500 Being payment of carriage and expensed. 5. Joint bank account Dr. 65,000 E Dr. 1,40,000 To Joint venture account 2,05,000 Being sales in cash and on credit. 6. Bills receivable account Dr. 1,40,000 To E 1,40,000 Being E’s acceptance of bill. 7. Joint bank account Dr. 1,37,000 Discount account Dr. 3,000 To Bills receivable account 1,40,000 Being the bill discounted on joint account. 8. Joint venture account Dr. 3,000 To Discount account 3,000 Being discount charges transferred. 9. Joint venture account Dr. 10,250 To A’s capital account 10,250 Being commission at 5% on sales. 10. Joint venture account Dr 34,250 To A’s capital account

175

11,416.67

To B’s capital account 11,416,67 To C’s capital account 11,416.66



11. A’s capital account Dr. 76,666.67 B’s capital account Dr. 51,416.67 C’s capital account Dr. 1,01,416.66 To Joint bank account 2,29,500.00 being the final settlement among partners.

Ledger Accounts:

Joint Venture Account To D 1,25,000 By Joint bank 65,000 To A 25,000 By E 1,40,000 To Joint bank 7,500 To Discount 3,000 To Account 10,250 To Profit : Account 11,416.67 B 11,416.67 C 11,416.65 34,250

2,05,000 2,05,000

A’s Capital Account

Particulars Rs. Particulars Rs. To Joint Bank 76,666.67 By Joint Venture account 25,000.00 By Joint Bank 30,000.00 By Joint Venture account 10,250.00 By Joint Venture account 11,416.67

76,666.67 76,666.67

B’s Capital Account

Particulars Rs. Particulars Rs. To Joint Bank 51,416.67 By joint Bank 40,000.00 By Joint Venture account 11,416.67

51,416.67 51,416.67

C’s Capital Account

Particulars Rs. Particulars Rs. To Joint Bank 1,01,416.66 By Joint Bank 90,000.00

1,01,416.66

By Joint Venture account 11,416.66

1,01,416.66

176

Joint Bank Account Particulars Rs. Particulars Rs.

To A’s capital account 30,000.00 By Dishonoured 1,25,000.00



To B’s capital account 40,000.00 By joint venture account 7,500.00 To C’s capital account 90,000.00 By A’s capital account 76,666.67 To joint venture account 65,000.00 By B’s capital account 51,416.67 To Bill receivable account 1,37,000.00 By C’s capital account 1,01,416.66

3,62,000.00 3,62,000.00 Illustration.2: Dinesh and Maneesh who share profit &losses equally undertook jointly, the construction of building each contributing Rs. 1,00,000 into a joint bank account, for a contract price of Rs. 5,00,000. They spent Rs. 1.25,000 on material and Rs 2, 00, 000 on wages. The contract price was duly received after the completion of the contract. Show the necessary account in the joint books of Dinesh and Maneesh.

Solution :

Joint Venture Account Particulars Rs Particulars Rs To Joint bank By Joint bank Contract Price. 5,00,000` Material 1,25,000 Wages 2,00,000 3,25,000 To Profit tr. to: Dinesh 87,500 Maneesh 87,500 1,75,000

5,00,000 5,00,000

Co-venturers Account

Particulars Dinesh

Rs. Maneesh

Rs. Particulars

Dinesh Rs.

Maneesh Rs.

To Joint bank A/c

1,87,500 1,87,500 By Joint venture A/c

1,00,000 1,00,000

By Joint venture –Profit

87,500 87,500

1,87,500 1,87,500 1,87,500 1,87,500

Joint Bank Account Particulars Rs. Particulars Rs.

To Dinesh-Contribution 1,00,000 By Joint venture A/c To Maneesh- Contribution 1,00,000 Material 1,25,000 To Joint venture A/c 5,00,000 Wages 2,00,000 By Dinesh 1,87,500

7,00,000

By Maneesh 1,87,500

7,00,000

177 Illustration.3 Kapli and Tendulkar jointly underwrite and place on the market 50, 000 equity shares of Mumbai Machineries Ltd of Rs. 10 each. It was agreed with the company that they would be allotted 2,000 Equity shares as fully paid towards their remuneration. Their profit sharing ratio is 3:2



Applications were received from the public only for 45,000 equity shares. Kapil paid Rs. 4,000 for postage and advertisement in addition to 60% of the amount required to take up the short subscription. Tendulkar financed the balance amount. There are accounted for through Joint bank account. All the shares including those allotted for remuneration were sold. Kapil sold 3,000 Equity shares for Rs. 25,000 and Tendulkar sold the balance shares for Rs. 48,000. Tendulkar incurred expenses of Rs. 2,000. Sale proceeds were retained individually.

Show necessary Ledger Accounts in the books of the ventures, which were separately kept for this purpose. The inter se account was settled through the Joint Bank Account. Solution:

Joint Venture Account Particulars Rs. Particulars Rs

To Joint bank 50,000 By Kapil Sale proceeds. 35,000 To Joint bank 4,000 By Tendulkar Sale proceeds. 48,000 To Joint bank-expenses 2,000 To Net profit Kapil 16,200 Tendulkar 10,800 27,000

83,000

83,000

Kapil Account

Particulars Rs. Particulars Rs To Joint venture A/c 35,000 By Joint bank A/c 34,000 To Joint bank A/c 15,200 By Joint venture A/c-Profit 16,200

50,200 50,200

Tendulkar Account

Particulars Rs. Particulars Rs To Joint venture A/c 48,000 By Joint bank A/c 22,000 By Joint venture A/c –

Profit 10,800

By Joint bank A/c 15,200

48,000 48,000

Joint Bank Account Particulars Rs. Particulars Rs

To Kapil 30,000 + 4,000 34,000 By Joint venture 4,000 To Tendulkar 20,000 + 2,000. 22,000 By Joint venture 2,000 To Tendulkar 15,200 By Joint venture 5,000 x 10. 50,000 By Kapil 15,200

71,200 71,200

178

Note: It has been assumed that 2,000 Equity shares issued against commission are over and above the 50,000 Equity shares to the public.



Illustration :4 A and B, both contractors, undertook a joint venture involving the construction of a building. A Joint Bank Account was opened in which a contributed Rs. 75,000 and B contributed Rs. 37,500. The contract price was Rs. 3, 75,000. The result of joint venture was shared as to a 2/3 and B 1/3. The details of the transactions were as follows. Rs.

Wages paid 89,000 Materials supplied by A 13,500 Materials supplied by B 12,000 Materials purchased 1,65,000 Salaries 12,000 Architect fee paid by A 18,500 Concrete mixer plant purchased 38,500

The stock materials on the completion of the contract, valued at Rs. 16,500, were taken over by A. Concrete mixer plant was taken over by B for Rs. 30,000. A was to be paid Rs. 18,000 p.a against establishment expenses, to be charged to the Joint Venture Account. The contract lasted for 8 months. Pass Journal Entries and prepare Joint Venture Account, Joint Bank Account and Accounts of A and B. Solution : Journal Entries Dr. Cr.

Rs. Rs. Joint Bank Account Dr 1,12,500 To A Account 75,000 To B Account 37,500 Being the amount contributed by A and B.

Joint Venture Account Dr. 89,000 To Joint Bank Account 89,000 Being wages paid.

Joint Venture Account Dr 25,500 To Account 13,500 To B Account 12,000 Being Materials supplied by A and B.

Joint Venture Account Dr. 1,65,000 To Joint Bank Account 1,65,000 Being materials purchased.

Joint Venture Account Dr 30,500 To Joint Bank Account 30,500 Being Salaries and Cartage paid.

Joint Venture Account Dr 10,000 To A Account 10,000 Being Architect fees paid by A.

Joint Venture Account

Dr

38,500

179

To Joint Bank Account 38,500 Being Contract Mixer Plant purchased.



Joint Bank Account Dr 3,75,000 To Joint Venture Account 3,75,000 Being Contract Price received.

A Account Dr 16,500 To Joint Venture Account 16,500 Being stock of materials taken over.

B Account Dr 30,000 To Joint Venture Account 30,000 Being concrete mixer plant taken over.

Joint Venture Account Dr 12,000 To A Account 12,000 Being 8 months establishment expenses paid.

Joint Venture Account Dr. 51,000 To A Account 34,000 To B Account 17,000 Being Profit transferred to A and B.

A Account Dr 1,28,000 B Account Dr 36,500 To Joint Bank Account 1,64,500 Being the balance amount paid.

Joint Venture Account .Particulars Rs. .Particulars Rs.

To Joint Bank A/cWages. 89,000 By Joint Bank A/c Contract price. 3,75,000 To A Account Materials supplied. 13,500 By A A/c Stock of Material. 16,500 To B Account Materials Supplied. 12,000 By B A/cContract Mixer Plant

taken. 30,000

To Joint Bank A/c Materials. 1,65,000 To Joint Bank A/c Salaries. 30,500 To A A/c Architect Fees. 10,000 To Joint Bank A/cConcrete Mixer. 38,500 To A A/c Establishment Expenses. 12,000 To Profit transferred to A 34,000 B 17,000 51,000

4,21,000 4,21,000

180

Co-venturers Account Particulars A B Particulars A B

Rs Rs Rs Rs



To Joint Venture A/c 16,500 By Joint Venture A/c 75,000 75,000 By Joint Venture A/c- To Joint Venture A/c 30,000 Materials 13,500 12,000 Architect Fess 10,000 To Joint Bank A/c 1,28,000 36,500 Establishment 12,000 By Joint Venture A/c- 34,000 17,000

1,44,500 66,500 1,44,500 66,500

Joint Bank Account

Particulars Rs Particulars Rs To A A/c 75,000 By Joint Venture A/c To B A/c 37,500 Wages 89,000 To Joint Venture A/c By Joint Venture A/c Contract Price 3,75,000 Materials 1,65,000 Salary 12,000 Cartage 18,500 Concrete Mixer 38,500 By A A/c 1,28,000 By B A/c 36,500

4,87,500 4,87,500

10.8.2. Recording in Each parties Books Individually Illustration .5: Koshi and Joshi were partners in a joint venture sharing profits and losses in the proportion of three-fifths and two-fifths respectively, Koshi supplies goods to the value of Rs. 10,000 and incurs on freight, Rs.500. Joshi also supplied goods to the value of Rs. 8,000 and incurs Rs. 400 towards freight and other incidental charges. Joshi sells the entire stock of goods on behalf of the joint venture for Rs. 25,000. Joshi is also entitled to a commission of 5% on sales. Joshi settles his account by remitting a bank draft... Pass necessary journal entries and ledger accounts in the books of both Koshi and Joshi.

Solution :

In the Books of Koshi Journal Entries

Particulars Dr. Cr. Rs Rs Joint Venture A/c Dr 10,500 To Purchases A/c 10,000 To Bank A/c 500 The value of goods sent to Joshi and expenses

incurred by us on account of joint venture.

Joint Venture A/c Dr

8,400

181

To Joshi 8,400 The value of goods supplied and expenses



incurred by Joshi on account of joint venture.

Joshi Dr 25,000 To Joint Venture A/c 25,000 The Joint sale proceeds of goods received by

Joshi on joint venture account.

Joint Venture A/c Dr. 1,250 To Joshi 1,250 The amount of commission at 5% on sale due

to Joshi.

Joint venture A/c Dr 4,850 To Joshi 1,940 To Profit & Loss A/c 2,910 The division of profit on joint venture in the

agreed proportion .

Bank A/c Dr 13,410 To Joshi 13,410 Receipt of balance due from Joshi.

Ledger Account

Joint Venture Account Particulars Rs Particulars Rs To Purchases 10,000 By Joshi 25,000 To Bank A/c 500 To Joshi 8,400 To Joshi 1,250 To Profit to Joshi 1,940 To Profit to P&L 2,910 4,850

25,000 25,000

Joshi Account

Particulars Rs Particulars Rs To Joint Venture A/c 25,000 By Joint Venture a/c 8,400 By Joint Venture A/c 1,250 To Joint Venture A/c Profit. 1,940 To Bank A/c 13,410

25,000 25,000

182

In the Books of Joshi Journal Entries

Particulars Dr.Rs. Cr Rs



Joint Venture A/c Dr 10,500 To Koshi 10,500 The value of goods supplied and expenses incurred by Koshi. Joint Venture A/c Dr 8,400 To Purchases A/c 8,000 To Bank A/c 400 The value of goods sent to Koshi and expenses incurred by us. Bank A/c Dr 25,000 To Joint Venture A/c 25,000 The sale proceeds of goods received in cash. Joint Venture A/c Dr 1,250 To commission A/c 1,250 The amount of commission at 5% on sales due to us. Joint Venture A/c Dr 4,850 To Profit & Loss A/c 1,940 To Koshi 2,910 The division of profit on joint venture in the agreed proportion. Koshi Dr 13,410 To Bank A/c 13,410 Remittance of balance due to Koshi.

Ledger Accounts Joint Venture Account

Particulars Rs Particulars Rs To Koshi 10,500 By Bank A/c 25,000 To Purchases A/c 8,000 To Bank A/c 400 To Commission A/c 1,250 Profit to : Koshi 2,910 P & L A/c 1,940 4,850

25,000 25,000

Koshi Account Particulars Rs Particulars Rs To Bank A/c 13,410 By Joint Venture A/c 10,500 By Joint Venture A/c 2,910

13,410 13,410

183 Illustration : 6 X and Y entered into a Joint Venture of underwriting the subscription at par for the entire share capital of Rama Ltd consisting of 10,000 Equity shares of Rs.10 each and to pay all expenses up to allotment. They were to share profits in the ratio of 3:2 respectively.



The consideration in return for the guarantee was 1,200 other shares of Rs. 10 each fully paid to be issued to them. X provided the funds for Registration fees Rs. 1,200; advertising Rs. 1,100 and printing and stationery Rs. 950. Y contributed towards payment of office rent Rs. 300; legal charges Rs. 1,550 and staff salaries Rs. 900. The prospectus was issued and applications fell short of the full issue by 1,500 shares. X took these over on Joint account and paid for the same in full. They received the 1,200 fully paid shares as underwriting commission. They sold their entire holding at Rs. 12 per share. The proceeds were received by X for 1,500 shares and Y for 1,200 shares. Write up Joint Venture account and Co-venturers accounts in the books of both the parties. Solution :

In the Books of X Joint Venture Account

Particulars Rs Particulars Rs To Bank By Bank sale proceeds of Registration 1,200 1,500 shares @ Rs.12. 18,000 Advertising 1,100 By Y sale proceeds of 1,200 Printing 950 3,250 Shares @ Rs. 12. 14,400 To Y Office rent 300 Legal charges 1,550 Staff salaries 900 2,750 To Bank-Subscription for shares not applied 15,000 To Profit Profit & Loss Account 6,840 Y Account 4,560 11,400

32,400 32,400

Y Account

Particulars Rs Particulars Rs To Joint venture account- By Joint venture account 2,750 Sale proceeds 14,400 By Joint venture 2/5th profit. 4,560 By Bank 7,090

14,400 14,400

In the books of Y

Joint Venture Account Particulars Rs Particulars Rs

To Bank By Bank-Sale proceeds Office rent 300 of 1,200 shares at Rs.12. 14,400 Legal charges 1,550 By X-Sales proceeds of Staff salary 900 2,750 1,500 shares at Rs. 12. 18,000 To X Account Registration fees

1,200

184

Advertising 1,100 Printing 950 3,250



To Xsubscription for shares.

15,000

To Profit Profit & Loss Account- 4,560 X Account 6,840 11,400 32,400 32,400

X Account

Particulars Rs Particulars Rs To Joint venture account By Joint account -Sale proceeds 18,000 expenses 3,250 To Bank final settlement. 7,090 By Joint venture account subscription 15,000 By Joint venture account 6,840 25,000 25,000

Note. The students should remember that no entry will be passed for the shares received from the company in consideration for the guarantee. Illustration .7: Ram and Rahim enter into a Joint venture to take building contract for Rs. 24, 00,000. They provide the following information regarding the expenditure incurred by them.

Ram Rahim Rs. Rs. Materials 6,80,000 5,00,000 Cement 1,30,000 1,70,000 Wages - 2,70,000 Architect’s fee 1,00,000 - License fee - 50,000 Plant - 2,00,000

Plant was valued at Rs. 1, 00,000 at the end of the contract and Rahim agreed to take it at that value. Contract amount of Rs. 24,000 was received by Ram. Profits or Losses to be shared equally. You are asked to show the ledger accounts in the books of both the parties Solution :

In the books of Ram Joint Venture Account

Particulars Rs. Particulars Rs. To Bank By Bank 24,00,000 Material 6,80,000 By Rahim : Plant 1,00,000 Cement 1,30,000 Architect’s fee 1,00,000 9,10,000 To Rahim : Material 5,00,000 Cement 1,70,000 Wages

2,70,000

185

Licenses fee 50,000 Plant 2,00,000 11,90,000



To Net profit transferred to:

Rahim 2,00,000 Profit & Loss A/c 2,00,000 4,00,000

25,00,000 25,00,000

Rahim Account

Particulars Rs Particulars Rs. To Joint venture A/c : Profit 1,00,000 By Joint venture A/c Sundries 11,90,000 To Bank 12,90,000 By Joint venture A/c: profit 2,00,000

13,90,000 13,90,000

In the books of Rahim Joint Venture Account

Particulars Rs. Particulars Rs. To Ram : By Ram : Contract

amount 24,00,000

Material 6,80,000 By Plant 1,00,000 Cement 1,30,000 Architect’s fee 1,00,000 9,10,000 To Bank : Material 5,00,000 Cement 1,70,000 Wages 2,70,000 Licenses fee 50,000 Plant 2,00,000 11,90,000 To Net Profit transferred to:

Ram 2,00,000 Profit & Loss A/c 2,00,000 4,00,000

25,00,000 25,00,000

Ram Account Particulars Rs Particulars Rs.

To Joint venture A/c: 24,00,000 By Joint venture A/c. Sundries 9,10,000 Contract amount By Joint venture A/c : Profit 2,00,000 By Bank 12,90,000 24,00,000 24,00,000



186 10.8.3. Memorandum Method Illustration .8: Bharat and Sharad joined together as co-ventures for equal share in profits through sale of television cabinets. On March 31, 2003, Bharat purchased 2,000 cabinets at Rs. 250 each for cash and sent 1,500 of these to Sharad for sale, the selling price of each being Rs. 300. All the cabinets were sold by April 30, 2003 by both and the proceeds collected. Each venture record in his books only those transactions concluded by him, final profit/loss being ascertained through account Memorandum Joint Venture Account. The expenses met by the ventures were:

Bharat Freight and insurance 9,000 Selling expenses 4,500 Sharad Wages 900 Selling expenses 13,500

Final settlement between the ventures took place on May 31, 2003. You are required to show the ledger accounts under Memorandum Method. Solution :

Ledger Accounts Memorandum Joint Venture Account

Particulars Rs Particulars Rs. To Purchases Bharat 2,000 x 250.

5,00,000

By Sales Bharat 500 x 300.

1,50,000

Sharad - Sharad 1,500 x 300. 4,50,000 To Expenses Bharat Freight

9,000

Selling Expenses 4,500 Sharad Wages 900 Selling expenses 13,500 To Net Profit Bharat 36,050 Sharad 36,050 72,100

6,00,000 6,00,000

In the Books of Bharat Joint venture with Sharad Account

Particulars Rs Particulars Rs. To Purchases Bharat 2,000 x 250.

5,00,000

By Cash 500 x 300.

1,50,000

To Cash By Cash Settlement. 3,99,550 Freight 9,000 Selling Expenses 4,500 To Share of Profit 72,100x1/2. 36,050

5,49,550 5,49,550



187

In the Books of Sharad Joint venture with Bharat Account

Particulars Rs Particulars Rs.

By Cash 1,500 x 300.

4,50,000

To Cash Wages 900 Selling Expenses 13,500 To Share of Profit 72,100x1/2. 36,050

To Cash Settlement. 3,99,550

4,50,000 4,50,000

10.9. Let Us Sum Up : In this lesson we have discussed nature and scope of joint venture in the contest of present business environment and application of the same under various methods followed by sufficient number of unsolved problems. 10.10. Lesson End Activities : 10.10.1. Recording in Separate Set of Books for Joint Venture Exercise :1 Rajeev and Ashok enter into a joint venture as dealers in land and opened a joint Bank account with Rs 60,000towards which Rajeev contributed Rs40.000. they agree to share profits and losses in proportion to their cash contribution. They purchased a plot of land measuring 5,000 square yards for Rs 50,000 .It was decided to sell the land in smaller plot and a plan was got prepared at a cost of 1.200. In the said plan 1/5th of the total area of the land was left over for public roads and the remaining land was divided into 8 plots of equal size. Out of 8 plots, 3plots were sold @ Rs 15 per square year and the remaining 5 plots were sold @ Rs 14 per squire yard. Expenses incurred in connection with the plots were. Registration expenses Rs. 4,000, Stamp Duty Rs. 400and Other Expenses Rs. 1,000 Allow 2% on the sale proceeds as a commission to Rajiv. Prepare necessary ledger accounts in the books of both parties. Exercise :2 A and B entered into a joint venture to construct a building for Rs. 10,000 payable in cash. A joint bank account was opened. A and B deposited Rs. 2, 50,000 and Rs. 1, 50,000 respectively. The profit or loss was to be shared in 2 : 1 ratio after providing interest at 10% on money deposited into bank by A and B. Details of transactions are Rs.

Purchases of Plant and materials 5,00,000 Wages paid 3,00,000 Materials supplied by A 70,000 Materials supplied by B 40,000

Contract was completed and price was duly received. B took over materials for Rs. 31,000 and joint venture was closed. Prepare necessary ledger accounts. Exercises:3. Vasanth and Charan enter into a joint venture to construct a building for a contract price of Rs. 5, 00,000 payable as Rs. 4, 00,000 in cash and the balance in the form of shares of a newly started joint stock company. They opened a Joint Bank Account; Vasanth is contributing Rs. 2, 00,000 and Charan Rs. 1, 50,000. They are to share profit and losses in the ratio of 2 : 1 Their transaction are as follows.

Material bought 1,20,000



Wages paid 1,80,000 Material supplied by Vasanth 10,000 Plant Supplied by Charan 28,000 Architect fees paid 2,000 Miscellaneous expenses 12,000

188 The contract was completed and the contract. The plant was taken over by Charan at an agreed value of Rs. 8,000. Shares were taken over by Vasanth at a mutually agreed price of Rs. 80,000. Prepare Joint Venture Account, Joint Bank Account and individual accounts of Vasanth and Charan in separate books of Joint Venture. Exercise:4. Ram, Bharat and Laxman undertook the construction of a Bridge at a contract price of Rs. 5, 00,000 payable in cash Rs. 4, 00,000 and in debentures Rs. 1, 00,000. They decided to share the profit and losses in proportion of their initial amount. They opened a Joint Bank Account wherein they deposited the following initial amount: Ram Rs. 2, 00,000; Bharat Rs. 2, 00,000 and Laxman Rs. 1, 00,000. The following payments are made through Joint Bank A/c Purchases of Cement Rs. 2,00,000; Purchases of Steel Rs. 50,000; payment of Wages Rs. 75,000; other charges Rs. 15,000. Ram brings the truck of Rs. 60,000; Bharat brings material of Rs. 80,000 and Laxman brings mixer worth Rs. 20,000 At the close of venture the unused materials was taken by Ram for Rs. 10,000. Bharat took over the mixer and steel for Rs. 35,000. The truck was sold in the market for Rs. 40,000. The contract price was received as per the agreement and Laxman agreed to take over debentures for 1, 00,000. Prepare: Joint Venture A/c, Joint Bank A/c and Co-venturers A/c. Exercises:5. Mohan and Sohan undertook the construction of a Cinema Hall for A payment of Rs. 3, 00,000. For this purpose, Mohan put Rs. 60,000 and Sohan put Rs. 50,000 in a joint Bank Account opened for this purpose. The following expenditures were made: Rs. On Materials 37,500 On Wages 60,000 On Plant 7,500 These payments were made out of the Bank Account, but in addition, Mohan supplied bags of cement which were valued at Rs. 7,500 The Cinema Hall was constructed, but due to certain defects, the owner deducted Rs. 60,000 from the payment which was made gradually. The plant was taken over by Sohan at Rs.4, 000 and the bags of cement left were taken back by Mohan at a value of Rs. 2,000. They shared profits and losses in the ratio of 2:1.Show the necessary ledger accounts. Exercise :6. M/s Amar, Akbar and Anthony enter into a joint venture and agreed to share profit equally. They purchased goods from Mr. Balu for Rs. 30,000 and from Mr.Amar for Rs.10, 000 on credit. Amar contributed Rs.10, 000, Akbar Rs. 16,000 and Anthony Rs. 20,000. They amounts were banked in a joint Bank Account. They settled the account of Mr. Balu by cheque and paid for carriage and other expenses Rs. 40,000 who accepted a bill for the amount. The bill was discounted for Rs. 39,600. Mr. Amar was allowed 8% commission on total sales for effecting the transactions. Prepare Joint Venture Account; Joint Bank Account and Co-venturers Account assuming that they settle their accounts by cheque. Exercise:7. Ram Gopi and Jain jointly undertook to construct a building for P and Co., at a price of Rs 2, 50,000. The price was to be paid as follows: Rs 2, 00,000 in cash, And Rs 50,000 by the issue of preference shares of the company.



Profit was agreed to be divided equally. The partners contributed as follows: Ram-Rs 30,000; Gopi-Rs 37,500 and Jain- Rs 20,000. The amounts were deposited in a joint Bank

Account opened with the state Bank of India. Ram got the plan prepared and paid Rs3, 500 as architect’s fees. Gopi brought into venture a concrete mixer of the value of Rs 12,000 and

189

join brought a lorry of the value of Rs 26,000. They bought a plant for Rs15, 000 materials worth Rs 1, 20,000 were purchased for cash and a sum of Rs 11,000; Jain took back his lorry at Rs 20,000. The plant is sold as scrap for Rs5, 000. When the contract price received, Ram agreed to take over the preference Shares at Rs 40,000. Open the Joint Venture Account, Joint Bank Account and the Accounts of Ram, Gopi and Jain. Exercise:8. Das, Bose and Gupta undertake to erect a five storied mansion for National Housing Trust Ltd. The contract price is agreed at Rs 25,00,000 to be paid in cash Rs.22,00,000 by four equal instalments and the balance amount in 8% Debentures of the company. They agree to share equally the profit or loss. They opened a Joint Bank Account with cash contributed as stated below: Das Rs 3, 00,000; Bose Rs 3, 75,000 and Gupta Rs2, 00,000 Das arranges the preparation of building plans etc. and pays Rs32, 000 as architect’s fees. Bose bring a concrete mixer and other instrumentslementsd valued at Rs 80,000 and Gupta brings a motor lorry valued at Rs 75,000. They paid in cash for the following: Rs Materials 12, 26,800 Wages 7, 33,200 Sundry Expenses 20,000 Plant 60,000 On completion of the venture concrete mixer is sold for Rs50, 000 and other implements are sold for Rs 10,000 Gupta takes back the motor the lorry Rs40, 000 Das took over the debentures issued by the company at a valuation of Rs 2, 80,000. Show the necessary accounts for the joint venture. Exercise:9. Gopal and Ahmed undertook jointly to construct a building for a contract price of Rs. 3, 00,000 A Joint banking account was opened by them in their joint names. Good paid into it Rs. 1, 00,000 and Ahmed Rs. 50,000. Profit and Loss is be distributed in the ratio 2 : 1. The details of transactions made are given below.

Rs. Wages 80,000 Materials Purchased 1,60,000 Materials supplied by Gopal 10,000 Materials supplied by Ahmed 8,000 Gopal paid architect’s fee 4,000

After the completion of contract, the price was duly received. There was stock of unused materials which were valued at Rs. 10,000, and this was taken over by Ahmed. Prepare Joint Venture a/c and Joint Bank A/c. Exercise:10. Maran, Saran and Maravan entered into a joint venture agreeing to share profits as 6 : 3 : 1 respectively. They paid into a Joint Bank Account their contribution amount as follows. Maran Rs. 60,000, Saran Rs. 40,000 and Maravan Rs. 20,000. Purchases paid from Joint Bank Account Rs. 1, 00,000. Most of the goods were sold for Rs. 2, 50,000. Maravan took over damaged goods for Rs. 1,500. Other expenses were as follows: Carriage paid by Maran Rs. 5,200. Rent paid by Saran Rs. 2,500 and Maravan paid for advertising Rs. 2,000. Prepare the necessary ledger accounts.



10.10.2. Recording in Each Parties Books Individually Exercise:11 X and Y entered into a joint-venture of underwriting the subscription at par of the entire share capital of Copper Mines Limited consisting of 10,000 shares of Rs. 10 each and to pay all expenses up to a allotment. They were to share profits in the ratio of 3 : 2 respectively. The consideration in return for the guarantee was 1,200 other shares of Rs. 10 each fully paid to be issued to them. X provided the funds for registration fees Rs. 1,200;

190 advertising Rs. 1,100 and printing and stationery Rs. 950. Y contributed towards payment of office rent Rs.300; legal charges Rs. 1,550 and staff salaries Rs. 900. The prospectus was issued and the application fell short of the full issue by 1,500 shares. X took these over on joint account and paid for the same in full. They received the 1,200 full paid shares as underwriting commission. They sold their entire holding at Rs. 12 per share. The proceeds were received by X for 1,500 shares and by for 1,200 share. Write up the necessary accounts in the books of the parties showing the final adjustment. Exercise:12. A and B entered into a joint venture contract for sharing the profits and losses in the ratio of 60 per cent and 40 per cent. Purchased goods worth Rs. 3, 00,000 and dispatched to B.A paid Rs.24, 000 in the process. B reported after some time that he had sold the goods for Rs. 3, 20,000 and the remaining were not being sold. Later on A and B decided to dispatch the goods on consignment basis to M/s C & Co., who agreed to sell the goods on their behalf. C was to be paid all the expenses plus 5 per cent commission. After few days C sent an Account Sales along with a cheque for Rs. 35,000 to B after deducting expenses Rs. 5,000 and commission.. The unsold remaining. goods were returned to B. B purchased the goods for Rs. 20,000. B prepared a statement of account to A and informed that he spent Rs. 14,500 on this joint venture. They agreed to settle their accounts. Prepare the necessary ledger accounts in the books of A and B showing the final settlement of accounts. 10.10.3. Memorandum Method Exercise:13. A and B enter into a joint venture as dealers in land with effect from 1 st July 2005. On the same day A advanced Rs. 90,000 and a plot of land, measuring 9,000sq yards, was purchased with this money. It was decided to sell the land in smaller plots and a plan was got prepared at a cost of Rs. 1,000 paid by B. In the said plan 1/3 rd of the total are of the land was left over for public roads and the remaining land was divided into 6 plots of equal size. On 1 st October 2005, two of the plots were sold at Rs. 30 per sq, yard, the buyer deducting Rs. 1,000 per plot for stamp duty and registration expenses to be borne by the seller. The remaining plots were sold at net price of Rs. Per sq. yard on 1 st December 2005. The sale proceeds of all the plots were received by A After charging interest at 6% p.a on the investments of A allowing for money received by him. and allowed 1% on the net sale proceeds of plots as commission to B, the net profit of the joint venture is to be shared in the proportion of 3/4 th to A and 1/4 th to B. Draw up the memorandum joint venture account and personal accounts.



191 10.11. Model Answers to Check your Progress : Exercise 1. Loss on JV : 250 Raju Account : 40,983 Asohk Account : 19,917 Joint Bank Account : 1, 17,500 Exercise 2. Profit on JV : 4,500 Ram A/c : 15,000 Gopi A/c : 40,000 Jain A/c : 27,500 Joint Bank A/c : 3, 07,500 Exercise 3. Profit on JV : 9,300 Amar A/c : 27,580 Akbar A/c : 90,100 Antony A/c : 23,100 Joint Bank A/c: 1, 01,600 Exercise 4. Profit on JV : 81,000 A A/c : 3, 99,000 B A/c : 2, 01,000 Joint A/c : 14, 00,000 Exercise 5. Profit on JV : 1, 36,000 Vasantha A/c : 1, 75,333 Charan A/c : 2, 60,667 Joint Bank A/c : 7, 50,000 Exercise 6. Profit on JV : 95,000 Ram A/c Bal : 2, 88,000 Bharat A/c Bal : 2, 83,000 Lakshman A/c Bal : 29,000 Joint Bank A/c : 9, 40,000 Exercise 7. Profit on JV : 1, 33,500 Mohan A/c BAL : 1, 54,500 Sogan A/c Bal : 90,500 Joint Bank A/c : 3, 50,000 Exercise 8. Profit on JV : 48,000 Gopal A/c :1, 46,000 Ahamed A/c : 64,000 Exercise 9. Profit on JV : 1, 41,800 Exercise 10. Profit on JV : 3, 53,000 Doss A/c : 1, 69,667



192 Boss A/c : 5, 72,667 Gupta A/c : 3, 52,666 Joint Bank A/c : 3, 35,800 Exercise 11. In the Books of X : Profit to Profit & Loss A/c : 6,840 Profit to Y : 4,560 Y A/c : 7, 090 In the Book of Y : Profit to Profit & Loss A/c : 4,500 Profit to X : 6,840 X A/c : 9,090 Exercise 12. In the Books of A Profit to Profit & Loss A/c : 21,900 Profit to B : 14,600 B A/c : 3, 45,900 In the Books of B Profit to Profit & Loss A/c : 14,600 Profit to A : 21,900 A A/c : 3, 45,900 Exercise 13. In the Separate Books Profit on Memorandum JV A/c : 63,750 In the Books of A JV A/c : 18,516 In the Books of B JV A/c : 18,516 Interest to A : 2,250 Interest from A : 580 10.12 References: Financial Accounting – R.L. Gupta – Sultan chand & Sons Advanced Accounting – S.N. Mageswari – Vikas Publishers.

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192 A

LESSON 11

BANK RECONCILATION STATEMENT

Contents : 11.0. Aims and Objectives 11.1. Introduction 11.2. Meaning 11.3. Causes of Difference 11.4. Illustrations 11.5. Let Us Sum Up 11.6. Lesson End Activities 11.7. Model Answers to Check your Progress 11.8 References 11.0. Aims and Objectives : In this lesson we are going to discuss

· meaning of pass book and cash book

· meaning of bank reconciliation statement

· circumstances under which it is required

· preparation of bank reconciliation statement and four headings.





193

11.1. Introduction : After studying this chapter you should be able to appreciate the utility of keeping an account with a bank by a business firm, identify the causes of difference between the balance shown by the bank Pass Book and the firm’s cash book. Explain the meaning and objective of preparing a Bank Reconciliation Statement. 11.2. Meaning : The balance as shown by the firm’s books in the bank account should tally with the balance shown by the bank’s books in the account of the firm. Of course, if in the books of the firm the bank account shows a debit balance, in the books of the Bank, the firm’s account will show a credit balance and vice-versa. However, the two balances rarely tally on account of the reasons given later in the chapter. All transactions relating to the Bank i.e., deposits or withdrawals of the money in or from the bank are recorded by the firm in the bank column maintained on each side of the cash book. The deposit of the money into the business bank account is recorded on the debit side of the cash in the Bank column, while the withdrawal of money from the bank is recorded on the credit side in the bank column of the cash book. The bank also maintains the firm’s account in its books. A copy of this account, it submits to the firm from time to time. The account so submitted by the bank to the customer is known as the Bank Pass Book or Bank Statement. 11.3. Causes of Difference : Following are the causes of difference in the balance as shown by the cash book and the bank pass book on any particular date : 11.3.1. Cheques deposited into the bank but not yet collected and credited: When cheques are deposited, in the books of the concern bank account in immediately debited but in the books of bank, the concern’s account is not credited until they are actually collected by the bank. It is quite usual that some of the cheques deposited by the concern may remain uncollected at the time the pass book is sent for comparison. For example, the concern may deposit a cheque for Rs. 5,000 on March 29 for collection. The bank collects the cheque on April 2. Now, if the balances on March 31 are compared, there will be different because Rs. 5,000 will not appear in the credit column of the pass book whereas in the cash book, the balance will be more by Rs. 5,000. 11.3.2.. Cheques issued but not yet presented for payment: Similarly, the entry for the issue of cheque is made in the books of the concern immediately and the bank account is credited. But in the books of bank, entry for payment can be made only when cheque is presented for payment. At the time of comparison it is quite possible to find out some cases where cheques were issued and recorded in the cash book but not presented for payment and remained unrecorded in the bank books and thus causing a difference. It should be remembered that a cheque can be presented for payment within three months from the date of issue. For example, the concern has issued a cheque for Rs. 7,000 to Mr. Xon March 26, 2007. Mr. X presented this cheque for payment to bank on 3 rd April 2007. The concern will record this payment on the credit side of the cash book in the bank column. on March, 26, thus reducing the bank balance. The bank, debits the pass book only on 3rd April when the cheque is present for payment. The balance in the bank pass book will be more than the balance as per cash book, if the two are compared on March, 31, 2007. 11.3.3.. Bank charges : Banks render many services to its clients and for that it levies charges. Entry for such charges is made by the bank but corresponding entry for it does not

194 appear in the cash book of the concern because it is not known to the client until he receives a statement. This causes a difference.



11.3.4. Amount collected or credited by bank on standing instructions : Often, a concern issues standing instructions to the bank to collect on its behalf dividends, interest etc. on investments. When the bank collects such amounts, it immediately credits the concern’s account with it. The necessary intimation and advice is sent to the concerned party after this is done. The concern will debit the bank account in the cash book only when it receives such intimation or when it gets the pass book duly completed from the bank. If, before this entry, the two balances are to be compared, the cash book balance will be lower than the bank pass book balance. 11.3.5. Amount paid or debited by the bank on standing instructions : The concern may also issue standing instructions to the bank for making some payments on its behalf and debit the concern’s account with it, e.g., life insurance premium, rent, payment of installments, payment of bill payable, etc. Whenever such payments are made by the bank, the concern’s account is immediately debited, thus, the pass book only when it gets intimation of such payment or the pass book from the bank. Till then, the two books will show difference. 11.3.6. Interest credited by the bank : Banks, normally, do not allow any interest on current accounts. But if it is allowed, the concern’s account is credited by the bank, which will enhance the firm’s balance with the bank. On the other hand, the firm will record it no the debit side of the bank account in the cash book only when the pass book is received. 11.3.7. Interest debited by bank on overdraft : If the firm withdraws more money from the bank than the available deposits with it, it is called an overdraft. Overdraft facility is permitted to the party by the bank only when it fulfils certain conditions. The bank charges interest on overdrawn balances. It debits the customer’s account periodically with such amount of interest. The firm will record the interest on the credit side of the cash book only when it gets the pass book duly completed. Till then, the two books will show different balances. 11.3.8. Direct payment by customers into the bank account : Sometime, customers may deposit money direct into the firm’s account in the bank. The bank will immediately record the entry on the credit side of the firm’s account and thus in the pass book and enhance the balance. But, the firm will debit the bank account in the cash book only when it gets the intimation or the pass book. In the meantime, if two balances are to be compared, the cash book balance will be lower than the pass book balance. 11.3.9. Dishonour of cheque or bills : When cheques are deposited in the bank for collection, the firm debits the bank account in the cash book. It increases the balance immediately. But the bank will credit the proceeds of cheques only when they are collected. If due to some reason, some cheques are dishonoured. i.e, not collected, the bank will not credit the firm’s account. The balance with the bank, thus, will be lower than in the cash book. The firm will credit the bank account only on receiving the information from the bank or when pass book is received. Similarly, when bills receivable are sent for collection to the bank, the firm, in case some are dishonoured, will credit the bank account only on getting intimation from the bank. In this case, too, if the two balances are compared, the cash book balance will be more than the pass book balance. 11.3.10. Errors : Difference in the two balances may also be due to some errors in the recording of transactions by either the firm or the bank. For example, the cheque deposited in the bank for collection may not be recorded at all; or the cheque may be forgotten to be sent to the bank though necessary entry has been recorded in the cash book.

195

11.4. ILLUSTRATIONS



11.4.1. Starting with Cash Book Favourable Balance Format :

Bank Reconciliation Statement as on …. Particulars Rs. Rs. Balance as per Cash Book

Add

Less

i..Cheques issued but not yet presented for payment. ii.. Incomes like dividend, interest etc., directly collected by the bank. iii. Interest on bank deposits credited in the pass book iv. Deposits directly made by the customers in to the bank v. Professional charges, if any, payable by the bank to the account holder. vi. Wrong entry, if any, on credit side of the pass book. i.. Cheques deposited but not credited by the bank. ii.. Expenses like insurance premium rent etc., directly paid by the bank. iii. Interest on overdraft debited in the pass book. iv. Payment directly made by the bank to customers. v. Bank charges, if any, payable by account holder to the bank. vi. Wrong entry, if any, on debit side of the pass book.

Balance as per Pass Book

Illustration : 1. From the following particulars prepare a Bank Reconciliation Statement as on 31st March 2007. Rs. Balance as per cash book 5,877 Cheques issued but not presented for payment 2,013 Cheques deposited but not cleared up to 31st March 2007 1,419 The bank had wrongly debited the firms account Rs. 225 which was not rectified until 31st March. Solution:

Bank Reconciliation Statement as on 31st March 2007 Particulars Rs. Rs. Balance as per Cash Book 5,877

Add: Cheques issued but not presented for payment 2,013 7,890

Less: Cheques deposited but not cleared 1,419 Amount wrongly debited in the pass book 225 1,644

Balance as per Pass Book 6,246

196 Illustration : 2. From the under-mentioned particulars of Mr. Mohan prepare a Bank Reconciliation Statement as 31st July 2007.



i. Cheques paid into Bank on the 28th July 2007 but credited to Mohan’s account in the first week of August 2007 Kalyan Rs. 1,000; Joy Rs.800; Raghul Rs. 1,200

ii. The following cheques were issued by Mohan on 30th July 2007 but presented to bank for payment after the close of the year. David Rs. 1,200; Hari Rs. 1,000; Lal Rs. 800.

iii. A cheque for Rs. 300 was credited direct to the account and was not passed through the cash book.

iv. The bank balance as per cash book on 31st July 2007 amounted to Rs. 30,000. Solution.

Bank Reconciliation Statement of Mr. Mohan as on 31st July 2007 Rs. Rs. Bank Balance as per cash book 30,000 Add: i. Cheques issued but not presented for payment David Rs. 1,200 Hari Rs. 1,000 Lal Rs. 800 3,000 ii. Cheque credited direct to the account

but not passed through the cash book

300

3,300 3,300 Less: Cheques paid into bank but not credited

in the pass book

Kalyan Rs. 1,000 Joy Rs. 800 Raghul Rs. 1,200 3,000 3,000

Bank balance as per pass book 30,300 Illustration : 3. Prepare a bank reconciliation statement from the following data as on 31.12.2007

Rs. a. Balance as per cash book 12,500 b. Cheques issued but not presented for payment 900 c. Cheques deposited in bank but not collected 1,200 d. Bank paid insurance premium 500 e. Direct deposit by a customer 800 f. Interest on investment collected by bank 200 g. Bank charges 100



197 Solution.

Bank Reconciliation Statement as on 31.12.2007 Rs. Rs. Balance as per cash book 12,500

Add : i. Cheques issued but not presented for payment 900 ii. Direct deposit by a customer 800

iii. Interest on Investment collected by bank 200 1,900 14,400

Less : i. Cheques deposited in bank but not collected 1,200 ii. Bank paid insurance premium 500

iii. Bank charges 100 1,800

Balance as per pass book 12,600 11.4.2. Starting with cash book overdraft balance Format:


Add:

Less:

i. Cheques deposited but not credited by the bank. ii. Expenses like insurance premium, rent etc., directly paid by the bank. iii. Interest on overdraft debited in the pass book. iv. Payment directly made by the bank to customers. v. Bank charges, if any, payable by account holder to the bank. vi. Wrong entry, if any, on debit side of the pass book. i. Cheques issued but not yet presented for payment. ii. Incomes like dividend, interest etc., directly collected by the bank. iii. Interest on bank deposits credited in the pass book iv. Deposits directly made by the customers in to the bank v. Professional charges, if any, payable by the bank to the account holder. vi. Wrong entry, if any, on credit side of the pass book.

Balance as per Pass Book Illustration : 4. From the following particulars ascertain the bank balance as would appear in the pass book as on 31st December, 2007. (i) The bank overdraft credit balance. as per cash book on 31st December, 2007

was Rs. 6,000. (ii) Interest on overdraft, six months ending 31st December, 2007 amounting to Rs. 200 is

debited in the pass book.



198 (iii) Bank charges for the above period also debited in the pass book which amounted to

Rs. 50. (iv) Cheques issued but not presented for payment before 31st December 2007 amounted to

Rs. 1,500. (v) Cheques paid into the bank, but not cleared and credited before 31st December, 2007

were Rs. 2,500. (vi) Interest on Government Securities collected by the bank and credited in the pass book

amounted to Rs. 1,800 Solution:

Bank Reconciliation Statement as on 31st December, 2007 Rs. Rs. Bank Overdraft as per cash book : 6,000

Add : Interest on overdraft debited in the pass book but not entered in the cash book.

200

Bank charges debited in the pass book but not entered in the cash book.

50

Cheques paid into the bank but not yet cleared 2,500 2,750 8,750

Less : Cheques issued but not yet presented for payment 1,500 Interest on Govt. Securities credited in the pass book

but not adjusted in the cash book.

1,800

3,300

Bank Overdraft as per Pass Book 5,450

Illustration : 5. The bank overdraft of Rajini on 31.12.2007 as per cash book is Rs. 9,000. From the following particulars, prepare bank reconciliation statement :

Rs. i. Unpresented cheque 3,000 ii. Uncleared cheque 1,700 iii. Bank interest debited in the pass book only 500 iv. Bill collected and credited in the pass book only 800 v. Cheque of Renu dishonoured 500 vi. Cheques issued to Sekhar entered in the Cash

column of cash book

300 Solution.

Bank Reconciliation Statement as on 31.12.2007 Rs. Rs. Bank Overdraft as per cash book 9,000 Add: i. Uncleared cheque 1,700 ii. Interest Debited 500 iii. Dishonoured cheques 500 iv. Cheques omitted from the Bank column 300 3,000 12,000 Less: i. Unpresented cheques 3,000 ii. Bill Collected 800 3,800

Bank Overdraft as per pass book 8,200



199 Illustration : 6. From the following particulars ascertain the bank balance as per bank pass of Mr. Ramnath as on 31.12.2007 (1) Bank overdraft as per cash book on 31.12.2007 Rs. 6,000 (2) Interest on overdraft for six months ending 31.12.2007 Rs. 200 is debited in the pass

book. (3) Cheques issued but not cashed before 31.12.2007 amounted to Rs. 1,500. (4) Cheques deposited into bank but not cleared and credited before 31.12.2007 amounted

to Rs. 2,500. (5) Interest on investments collected by bank and credited in bank pass book amounted to

Rs. 1,800. (6) Bills receivable which was discounted with the bank in November 2007, was

dishonoured on 31.12.2007 and bank had debited Rs. 1,050 including Rs. 50 for bank charges.

(7) The bank column of cash book receipts side was over cast by Rs. 1,000 in December 2007.

(8) Bank had wrongly debited Mr. Ramnath for Rs. 500 on 10.12.2007, on account of dishonour of cheque pertaining to Mr. Ramgopal but rectified the said mistake on 30.12.2007

Solution. Bank Reconciliation Statement of Mr. Ramnath as on 31.12.2007

Rs. Rs. Overdraft as per cash book 6,000 Add: i. Interest on overdraft not entered in cash book 200 ii. Cheques deposited into bank but not yet credited 2,500 iii. Bills receivable dishonoured and Bank charges of Rs. 50

not entered in cash book.

1,050

iv. Over casting of bank column of the receipt side of the cash book

1,000

4,750

10,750 Less: i. Cheques issued but not cashed 1,500 ii. Interest on Investment collected by bank, not entered in

cash book

1,800

3,300

Overdraft as per bank pass book 7,450 11.4.3. Starting with pass book favourable balance Format


Add:

i. Cheques issued but not yet presented for payment. ii. Incomes like dividend, interest etc., directly collected by the bank. iii. Interest on bank deposits credited in the pass book iv. Deposits directly made by the customers in to the bank v. Professional charges, if any, payable by the bank



Less:

to the account holder. vi. Wrong entry, if any, on credit side of the pass book. i. Cheques deposited but not credited by the bank. ii. Expenses like insurance premium, subscriptions etc., directly paid by the bank. iii. Interest on overdraft debited in the pass book. iv. Payment directly made by the bank to customers. v. Bank charges, if any, payable by account holder to the bank. vi. Wrong entry, if any, on debit side of the pass book.

200

Balance as per Pass Book Illustration : 7. On 31st March 2007, the Pass Book of Mr. V. Shanmugam showed account credit balance Rs. 9,250. Account comparison of pass book and cash book revealed the following :

Rs. a. Cheques deposited but not yet cleared by 31st March 2007 1,500 b. Cheques issued by Shanmugam but not presented for payment

before 31st March 2007.

2,000 c. Insurance Premium paid by the bank on behalf of shanmugam but

not recorded in the cash book

240 d. Bank commission not yet recorded in the cash book 10 e. Interest on bonds collected by the bank on behalf of shanmugam

not yet-recorded in the cash book.

500 From the above particulars prepare account bank reconciliation statement as on 31st March, 2007. Solution.

Bank Reconciliation Statement of Mr. V. Shanmugam as on 31st March, 2007 Rs. Rs. Bank Balance as per Pass Book : 9,250 Add : Cheques deposited but not cleared

Insurance premium paid by the bank but not recorded in the cash book.

1,500 240

Bank commission charged in the pass book, but not entered in the cash book.

10

1,750

11,000 Less : Cheques issued but not yet presented for payment 2,000 Interest on bonds collected by the bank and credited in the

pass book

500

2,500

Bank Balance as per Cash Book : 8,500 Illustration : 8. From the following particulars, ascertain the bank balance as per cash book of Swamy as at 31st March 2007. (i) Credit balance as per pass book as on 31.03.2007 Rs. 2,500. (ii) Bank charges of Rs. 60 had not been entered in the cash book.



201 (iii)Out of the cheque of Rs. 3,500 paid into the bank, a cheque of Rs. 1,000 was not yet

credited by the banker. (iv) Out of the cheques issued for Rs. 4,500, cheques of Rs. 3,800 only were presented for

payment. (v) A dividend of Rs. 400 was collected by the banker directly but not entered in the cash

book. (vi) A cheque of Rs. 600 had been dishonoured prior to 31.03.2007, but no entry was made in

the cash book. Solution.

Bank Reconciliation Statement of Swamy as on 31.03.2007 Rs. Rs. Credit Balance as per pass book 2,500

Add: i. Bank charges debited in pass book 60 ii. Cheque deposited but not credited 1,000 iii. Cheque dishonoured but not entered in cash book 600 1,660 4,160

Less: i. Cheques issued but not presented for payment 700 ii. Dividend collected by bank not entered in cash book 400 1,100

Balance as per cash book 3,060

Illustration : 9. From the following particulars, prepare account bank reconciliation statement as on 28 th February 2007. The Bank Pass Book showed account credit balance of Rs. 9,436 on that date. a.. Out of the total cheques amounting to Rs. 1,536 issued during the month, cheques of

Rs. 496 were presented for payment in march 2007. One cheque of Rs. 50 issued to an upcountry party was lost in transit.

b.. The Bank had in accordance with the standing instructions of the account holder, paid life insurance premium of Rs. 427, for which no entry is recorded in his books.

c.. One of his customers directly deposited in the Bank Rs. 1,000 for which no entry is recorded in his books.

d.. A cheque for Rs. 579 was deposited in the Bank on 15th February and the same was not recorded in the cash book.

f.. The cash book bank column. did not show the bank charges debited by the bank amounting to Rs. 12.

Solution Bank Reconciliation Statement as on 28th February 2007

Rs. Rs. Bank balance as per pass book 9,436 Add: Life insurance premium paid by the Bank 427 Add : Bank charges debited in the Pass Book 12 439

9,875 Less: Cheques issued but not presented 496 Less : Cheque lost in transit 50 Less : Amount directly deposited by a customer 1,000 Less : Cheuqe deposited and credited by the bank 579 2,125

Bank Balance as per Cash Book 7,750



202 11.4.4. Starting with pass book overdraft balance Format:


Add:

Less:

i.. Cheques deposited but not credited by the bank. ii.. Expenses like insurance premium, Rent etc., directly paid by the bank. iii. Interest on overdraft debited in the pass book. iv. Payment directly made by the bank to customers. v. Bank charges, if any, payable by account holder to the bank. vi. Wrong entry, if any, on debit side of the pass book. i..Cheques issued but not yet presented for payment. ii.. Incomes like dividend, interest etc., directly collected by the bank. iii. Interest on bank deposits credited in the pass book iv. Deposits directly made by the customers in to the bank v. Professional charges, if any, payable by the bank to the account holder. vi. Wrong entry, if any, on credit side of the pass book.

Balance as per Pass Book Illustration : 10. On 30th June, 2007 pass book of Mr. Raman showed an overdraft balance debit balance. of Rs. 4,768.75. Prepare account bank reconciliation statement. Rs. a.. Cheques issued but not presented for payment 876.25 b.. Cheques deposited with the bank but not cleared 1,200.50 c.. Bank charges in the pass book 25.30 d.. Interest collected by the bank 270.80 Solution.

Bank Reconciliation Statement as on 30th June 2007 Rs. Rs.

Bank Overdraft as per pass book 4,768.75 Add: Cheques issued but not presented 876.25

” Interest collected by the bank 270.80 1,147.05 5,915.80

Less: Cheques deposited with the bank but not cleared 1,200.50 Bank charges in the pass book 25.30 1,225.80

Bank Overdraft as per cash book 4,690.00



203 Illustration : 11. From the following particulars of Mr. Kumar prepare account bank reconciliation statement as on 31.10.2007. The Bank Pass Book showed debit balance Rs. 500 on that date. i. Cheques issued by Kumar in October 2007 of Rs. 4,535 of which cheques amount

Rs. 3,535 were paid by the bank by 31st October 2007. ii. Kumar deposited cheques amounting to Rs. 5,000 on 31st October 2007 which were

realized on 1st November 2007. iii. Mr. Velan a customer had directly deposited a sum of Rs. 3,000 on 24th October 2007

with the bank. Kumar recorded this receipt on 4th November 2007. iv. The bank debited kumar’s account with Rs. 1,520 on 31.10.2007 for a dishonoured

bill no entry was passed in his books. v. On 31.10.2007, his account was credited with Rs. 130 being dividend collected by the

bank. vi. On the same date, his account was debited with Rs. 10 being bank charges. Prepare reconciliation statement as on 31.10.2007. Solution.

Bank Reconciliation Statement of Kumar as on 31.10.2007 Rs. Rs. Overdraft balance as per pass book 500

Add: i. Cheques issued but not presented 1,000 ii. Cheque deposited by a customer 3,000 iii. Dividend collected by bank 130 4,130 4,630

Less : i. Cheques deposited but not credited 5,000 ii. Dishonoured bill 1,520 iii. Bank charges 10 6,530

Balance as per cash book Dr.. 1,900

Illustration : 12. Prepare a Bank Reconciliation Statement on 31 st December 2007. i. A's overdraft as per Pass Book was Rs. 31st December 2007 was Rs. 12,000 ii. On 30th December cheques had been issued for Rs. 7,000 of which cheques worth

Rs. 3,000 only had been encashed upto 1 31st December. iii. Cheques amounting to Rs. 3,500 had been paid into the bank for collection but of

these only Rs. 500 had been credited in the Pass Book. iv. The bank charged Rs. 500 as interest on overdraft, the intimation of which has been

received on 2 January 2007. v. The Bank Pass Book shows account credit for Rs. 1,000 representing Rs. 400 paid by

a debtor of A direct into the bank and Rs. 600 collected direct by the bank in respect of interest on A’s investments. A had no knowledge of these items.

vi. A cheque for Rs. 200 had been debited in bank column of Cash Book by A, but it had not been sent to Bank.

Solution: Bank Reconciliation Statement as on 31st December 2007.

Debit balance as per Pass Book

Rs.

Rs. 12,000

Add: Cheques issued but not presented for payment 4,000 ” Direct payment received by bank from A's debtor 400 ” Interest on investment directly received by the bank 600 5,000

17,000



Less

Cheques sent for collection but not collected

3,000

204

” Interest on overdraft 500 ” Cheque entered in cash book but not sent to bank 200 3,700

Credit Balance as per Cash Book overdraft. 13,300 11.5. Let Us Sum Up:

In this lesson we have discussed meaning and nature of reconciliation statement and the cause reasons for arising of different between pass book and cash book. 11.6. Lesson End Activities : 11.6.1. Starting with cash book favourable balance Exercise : 1. The bank balance as per cash book was Rs. 19,600 on 31 st March 2007. The following cheques were paid into he foreign bank current account in March 2007 but were credited by the bank in April 2007. Raman Rs. 800; Chandran Rs. 600 Mohan Rs. 400. The following cheques were issued by the firm in March 2007 but were cashed in April 2007: Balan Rs. 1,000, Vasu Rs. 500. The pass book shows a credit of Rs. 360 for interest on debit of Rs. 80 for bank charges the pass book contains also an entry for Rs. 480 being the payment made by a customer direct into the bank. Exercise : 2. From the following particulars extracted the books of Mr. Jeyaraj, prepare account Bank reconciliation statement showing the balance as per pass book as on 31st January 2007. i. The bank balance as per cash book was Rs. 7,000 on 30.01.2007. ii. Cheques amounting to Rs. 800 were issued in January 2007 but presented for payment

in February 2007. iii. Cheques amounting to Rs. 1,800 were paid in the bank in January 2007 but were

credited in the bank in February 2007. iv. A cheque of Rs. 600 which was received from a customer was entered in the Bank

Coloumn of the cash book January 2007 but the same was paid into the bank in February 2007.

v. The pass book shows a credit of Rs. 250 for interest and a debit of Rs. 50/- for Bank charges.

Exercise : 3. From the following particulars prepare a Bank Reconciliation Statement as on 31st December 2007. i.. Balance as per cash book Rs. 5,800. ii.. Cheques issued but not presented for payment Rs. 2,000. iii.. Cheques sent for collection but not collected upto 31st December, 2007 Rs. 1,500. iv.. The Bank had wrongly debited the account of the firm by Rs. 200 which was rectified

by them after 31st December. Balance as per Pass Book is Rs. 6,100. 11.6.2. Starting with cash book overdraft balance Exercise : 4. The Cash book of account trader showed a credit balance of Rs. 875 on 31st December 2007. On verification with the Bank Pass book it was found that. i. A cheque for Rs. 300 dishonoured was not entered in the cash book.



ii. Bank charges amounting to Rs. 10 were not recorded through the cash book. iii. There was a wrong credit of Rs. 750 in the cash book. iv. Cheques for Rs. 580 paid into account branch of the Bank on 31st December, had not

been entered in the Pass book. 205

v.. Interest amounting to Rs. 970 was received by the bank and not entered only in the

Pass Book. vi.. A cheque for Rs. 250 was paid into the Bank for collection but the cash book showed

no entry for it. Prepare Bank Reconciliation Statement as on 31st December 2007. Exercise : 5. From the following particulars, ascertain the bank balance as per pass book as on 31st December 2007. i.. Credit balance as per cash book on 31.12.2007 was Rs. 1,500. ii.. Interest balance as per Cash Book Rs. 50 is recorded only in the pass book. iii.. Bank charges made by the bank Rs. 12.50 were also recorded only in the pass book. iv.. Cheques paid into bank Rs. 2,500 but cheques Rs. 1,875 were cleared and credited in

the pass book. v.. Cheques issued to creditors for Rs. 2,250 of which only one cheque for Rs. 750 was

presented by 31st December 2007. vi.. Dividend on shares Rs. 450 were collected by bankers directly and no information to

the trader. Exercise : 6. From the following information, prepare a Bank Reconciliation Statement as at 31st December 2007 for Messrs New Steel Limited : Rs.

i.. Bank overdraft as per cash book on 31st December 2007 2,45,900 ii.. Interest debited by the bank on 26th December 2007 but no advice received 27,870

iii.. Cheque issued before 31st December but not yet presented to bank 66,000 iv.. Transport subsidy received from the State Government directly by the bank

but not advised to the company.

42,500 v.. Draft deposited in the bank, but not credited till 31st December 13,500

vi.. Bills for collection credited by the bank till 31st December but no advice received by the company.

83,600

vii.. Amount wrongly debited to company account by the bank, for which no details are available.

7,400

11.6.3. Starting with pass book favourable balance Exercise : 7. On 31st December the pass book of Anbumani showed account balance at Bank Rs. 10,500. The cash book showed account different balance. You are required to prepare a Bank reconciliation as on 31st December 2007 after considering the following items. i. Cheques issued but not Presented for payment Rs. 1,000. ii. Cheques paid, but not collected and credited by the banker Rs. 500. iii. The banker has given account credit in the pass Book for interest on the balance kept

with them Rs. 70. iv. There is a debit in the pass book for bank charges Rs. 10. v. As per the standing instructions, the banker has collected interest on investments and

credited in the pass book, but no entry has been passed in the cash book. The Amount being Rs. 700.

vi. A cheque received from Balan although entered in the cash book as deposited has been omitted to be deposited with the bank Rs. 600.



vii. A cheque paid into bank and credited in the pass book for Rs. 200 has been subsequently dishonoured and debited in the pass book only.

viii. According to the standing instruction the banker debited in the pass book for payment of insurance premium Rs. 150.

206

Exercise : 8. From the following particulars prepare account Bank Reconciliation Statement of Govindhan as on 31st December 2007. i. Balance as per Pass Book on 31st December 2007 Rs. 8,500 ii. Cheques for Rs. 5,100 were issued during the month of December but of these

cheques for Rs. 1,200 were presented in the month of January 2007 and one cheque for Rs. 200 was not presented for payment.

iii. Cheques and cash amounting to Rs. 4,800 were deposited in Bank during December but credit was given for Rs. 3,800 only.

iv. A customer had deposited Rs. 800 into the Bank directly. v. The Bank has credited the merchant for Rs. 200 as interest and has debited him for

Rs. 30 as bank charges, for which there are no corresponding entries in the Cash Book.

Exercise : 9. From the following information prepare the Bank Reconciliation Statement of Bas on 31st January 2007.

Rs. Balance as per Pass Book 30,000 Cheque collected for B credited to C 1,500 Cash deposit of Rs. 4,770 recorded by bank 4,800 Pass Book withdrawal column undercast 300 Credit entry of Rs. 4,500 in Pass book wrongly entered on debit side Cheque paid by bank recorded twice in pass book 1,050 D's cheque of Rs. 3,000 wrongly credited by bank to the account of B.

11.6.4. Starting with pass book overdraft balance Exercise : 10. On 31st December 2007 the pass book shows an overdraft of Rs. 7130. On verification with the Bank Pass Book, it is observed that the adjustments regarding the following are to be made : i.. Cheques issued for Rs. 3,000 out of which cheques for Rs. 2,100 have so for been

Presented for payment. ii.. He had paid in cheques amounting to Rs. 2,000 on 29.12.2007 of which he finds that

Rs. 300 has been credited in the Pass Book on 02.01.2008. iii.. Rao has paid into Bank directly sum of Rs. 300 on 28th December, which has not

been entered in the Cash Book. iv.. The bank had charged Rs. 10 towards commission and Rs. 250 forwards interest on

overdraft on 2007. v. The banker has given a wrong credit for Rs. 50. vi. A standing charges of Rs. 300 for insurance premium paid by the bank on December

had been entered in the cash book on December 29. vii. There was a wrong credit to Rs.2 in the Cash book. viii. There was a wrong debit in the Pass book for Rs.5 Exercise : 11. From the following Particulars, prepare account Bank Reconciliation Statement of Mr. C as at 30th September 2007.



i. Overdraft balance on 30th September, 2007 as per pass book Rs. 13,095. ii. Cheques deposited in Bank but not recorded in Cash book Rs. 105. iii. Cheque received and recorded in Bank column but not sent to Bank for collection

Rs. 1,015. iv. The credit side of the Bank column of the cash book was cost Rs. 1,000 short.

207 v. Chamber of commerce fee of Rs. 250 was paid by the bank, it was not recorded in

cash book. vi. In the cash a bank charge of Rs. 30 was recorded twice, while another bank charge of

Rs. 45. was not recorded at all. Exercise : 12. Prepare Bank Reconciliation statement as on 31.12.2007 from the following information. i.. Balu’s overdraft as per pass book on 31.12.2007 Rs. 12,000. ii.. On 30.12.2007 cheques had been issued for Rs. 7,000 for which cheques worth

Rs. 3,000 only had been encashed upto 31.12.2007. iii.. Cheques amounting to Rs. 3,500 had been paid into bank for collection but on these

only Rs. 500 had been credited in the pass book. iv.. Bank charged Rs. 500 as interest on overdraft and the intimation of which has been

received on 2nd January 2008. v.. The Bank pass book shows credit for Rs. 1,000 representing Rs. 400 paid by a debtor

into the bank and Rs. 600 collected directly by the bank as income from investment, Balu had no knowledge of these.

11.7. Model Answers to Check your Progress : Exercise : 1. Balance of CB : 19,600 Balance of PB :19,600 + 1,000 + 500 + 360 + 480 = 21,940 – 800+600+400+80. = 20,060 Exercise : 2. Balance of CB : 7,000 Balance of PB : 7,000 + 800 + 850 – 1,800 – 600 – 50 = 5,600 Exercise : 3. Balance of CB : 5,800 Balance of PB : 5,800 + 2,000 – 1,500 – 200 = 6,100 Exercise : 4. Balance of CB OD. : 875 Balance of PB : 875 + 300 + 100 + 580 – 750 – 970 – 250 = 205 Exercise : 5. Balance of CB OD. : 1,500 Balance of PB : 1,500 + 50 + 12.50 + 625 – 1,500 – 450 = 237.50 Exercise : 6. Balance of CB OD. : 2,45,900 Balance of PB : 2,45,900 + 27,870 + 13,500 + 7,400 – 66,000 – 42,500 – 83,600 = 1,02,570



208 Exercise : 7. Balance of PB : 10,500 Balance of CB : 10,500 + 500 + 600 + 10 + 150 + 200 – 1,000 – 70 – 70 10,190 Exercise : 8. Balance of PB : 8,500 Balance of CB : 8,500 + 1,000 + 30 – 1,400 – 800 – 200 = 7,130 Exercise : 9. Balance of PB : 30,000 Balance of CB : 30,000 + 1,500 + 9,000 + 1,050 – 30 – 300 – 3,000 = 38,220 Exercise : 10. Balance of PB OD. : 7,830 Balance of CB : 7,830 + 900 + 300 + 50 + 2 – 300 – 10 – 250 – 5 = 8,517 Exercise : 11. Balance of PB OD. : 13,095 Balance of CB : 13,095 + 105 + 30 – 1,015 – 1,000 – 250 – 45 = 10,920 Exercise : 12. Balance of PB OD. : 12,000 Balance of CB : 12,000 + 4,000 + 400 + 600 – 3,000 – 500 = 13,500 11.8 References: Financial Accounting – R.L. Gupta – Sultan chand & Sons Advanced Accounting – S.N. Mageswari – Vikas Publishers.

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208 A

LESSON 12

ACCOUNTS OF NON-TRADING ORGANISATIONS

Contents : 12.0. Aims and Objectives 12.1. Introduction 12.2. Meaning of Non Trading Organisation 12.3. Specific Terms Used in Non Trading Organisation 12.4. Accounting Procedure 12.5. Illustrations 12.6. Let Us Sum Up 12.7. Lesson End Activities 12.8. Model Answers to Check your Progress 12.9 Referneces 12.0. Aims and Objectives : In this lesson we are going to discuss

· the various terms relating to non trading organisations

· preparation of receipts and payments account

· preparation of income and expenditure account

· distinction between receipts and payments account and income and expenditure

account

· distinction between income and expenditure account and profit and loss account

· accounting treatment of certain expenses and income

· accounting treatment of special fund

· preparation of final accounts on non trading concern.





209

LESSON 12

ACCOUNTS OF NON TRADING ORGANISATIONS

12.1. Introduction : People join together in voluntary organizations like sports clubs, trade unions, consumer co-operatives, political associations, automobile associations, medical associations, educational Institutions, hospitals, and so on for various reasons: for mutual entertainment, for protection, for professional reasons, or for the promotion of art and culture. The aim of such organizations is the pursuit of some interest other than financial gain. Nevertheless, these organizations must have money to promote their activities and money must be honestly accounted for. The officer elected for the purpose. The treasurer collects subscriptions from the members and spends money on such activities as are needed for achieving the aim of the organization. At the Annual General Meeting, the treasurer submits suitable final accounts to the members. In this chapter it is proposed to take up the preparation of final accounts suitable for such organizations.

12.2. Meaning: The non-profit making organisations or institutions are different from profit making institutions in several respects. They have not to purchase or sale goods or receive bills of exchange nor do have to make credit transactions. Most of their transactions are cash transactions and therefore they need not maintain detailed books of accounts like profit making concerns. However, they do maintain Cash Book and minimum number of such other books which may be required for their purpose. For example, a Register of Members and a Minute Book are maintained in case of a club or society, a Student Fee Register is maintained in case of a school or college, a summary record of outstanding fees may be kept by an Advocate or a Chartered Accountant. At the end of the accounting period, a non-profit making institution also prepares its final accounts which include the following: i. Receipts and Payments Account.ii. Income and Expenditure Account. and iii. Balance Sheet.

12.3. Specific terms: 12.3.1. Subscriptions: In case of trading concerns, subscriptions are usually given, e.g., subscriptions for trade journals, subscriptions for membership of a club, etc., In case of a non- trading concern, subscriptions are usually received. For example, a club receives subscriptions from its members and this may be a major source of the club. The Receipts and Payments Account records the amount of actual subscriptions received while the Income and Expenditure Account records only the subscriptions which relate to the accounting period; whether received or not. Adjustment may, therefore, be required to find out the actual amount of income from subscriptions. 12.3.2. Donations: A Charitable institution may receive donations from time to time. The amount of donations may be taken as income or capitalized and taken to Balance Sheet depending upon whether it is a specific donation or general donation.

(a) Specific donation: In case a donation has been received for a specific purpose, the donation is termed as a specific donation. For example, an institution may receive donation for construction of building or for giving prizes to the best sportsman. The amount of such donation cannot, therefore, be used for any other purpose. It should be taken to Balance Sheet on the liabilities side and be used only for the purpose for which it is meant, irrespective of the amount.

(b) General donation: A donation not received for a specific purpose is termed as a General Donation. Its treatment depends upon the amount received. In case, the donation is of a substantial amount, it can be fairly taken for granted that such donation is of a non-recurring nature and therefore, should be taken to the Balance Sheet on the liabilities side.



210 However, if the donation is of a small amount and not meant for a specific purpose, it can be safely taken to the Income and Expenditure Account. 12.3.3. Special Funds: An institution may keep special funds for some special purpose. For example, a sports club may keep a special fund for meeting sports expenses or for awarding of sports prizes. In case such special funds are maintained, any income relating to such special funds should be added to these funds in the the Balance Sheet on the liabilities side. Similarly, all expenses on account of these funds should be deducted out of these funds. In case of a deficit, the amount should be met out from the income and expenduiture account.In case of a surplus, it will be better on account of convention of conservatism, to be keep it in the balance sheet or merged it with the capital fund.

12.3.4. Entrance Fees : Entrance fee or Admission Fee is usually charged by a club or a society or an educational institution from the new entrants. It is usually taken as an item of income. However, in case of clubs and similar institution some people favour capitalising the entrance fee on the ground that it is of a non – recurring nature and being charged by the club as a premium from the new members towards the capital cost involved in establishing and maintaining the club by older members.

12.3.5. Life Membership Fees : Certain institutions charge fee for making persons as life members. Such members have to pay fee only once in their life – time. Of course they continue to enjoy the benefits from the institution throughout their life.

12.3.6. Sale of old newspapers: The amount received on account of sale of old newspapers is of a recurring nature and should, therefore, be taken as Income in the Income and Expenditure Account.

12.4. Accounting Procedure: 12.4.1. Receipts and Payments Accounts:

i. Meaning: Receipts and Payments Account is merely a summary of the cash transactions under proper heads which have taken place during the accounting period. It is prepared at the end of the accounting period from the cash book. The Cash Book contains a record of cash receipts and cash payments in a chronological order while receipts and payments account is a summary of total cash receipts and total cash payments received and made under different heads during a particular period. For example, if a club receives subscriptions from its members on different dates of accounting year, they will be recorded on these dates separately in the Cash Book. However, Receipts and Payments Account will contain the total subscription received during the accounting years. Similarly Cash Book contains payment of salaries made on different dates of the month on different pages. The Receipts and Payments Account will show the total salaries paid during the accounting period. ii. Features: The main features of the Receipts and Payments Account can be summarised as follows: (i) It is an abbreviated copy of the cash book. The cash and bank items are usually merged

in one column. Thus, contra entries between cash and bank are eliminated.

(ii) It is Real Account

iii. All cash receipts are recorded on the debit side while all cash payments are recorded on the credit side.

211



iv. It records all cash receipts and payments irrespective of the fact whether they are of

capital or revenue nature or whether they relate to the current year or not. Similarly, it records all cash payments whether they are of capital nature or whether they relate to the current year or the next year. What is necessary is the receipts and payments should have been received or made during the period to which the Receipts and Payments Account relates.

12.4.2. Income and Expenditure Account: i. Meaning : It is Nominal Account. It is in the form of Profit and Loss Account. It is concerned with only revenue items-expenses and incomes. It records all losses and expenses on its debit side and all incomes and gains on its credit side. Of the incomes and expenses of revenue nature, only the portion pertaining to the current year is shown in the Income and Expenditure Account. i.e. amount relating to the previous year or future year are excluded. Again, the incomes and expenses of current year, whether received or not, must be shown. In other words, incomes and expenses have to be adjusted for both out-standing and pre-payments. All non-cash items, Depreciation, Bad debts, Provision for Doubtful Debts etc., are taken into account. The difference between the debit side and the credit side is either surplus or deficit for the year concerned and the difference will be transferred to the Capital Fund also called General Fund or Accumulated Fund. appearing in Balance Sheet.

ii. Features : Its essential features can be put as follows : i. It is a Nominal Account.

(ii) It records all losses and expenses on its debit side while all incomes and gains on its credit side.

iii. The balance of this account represents either the excess of income over the expenditure or excess of expenses over income.

12.4.3. Distinction between Receipts and Payments Accounts and Income and Expenditure Accounts.

Receipts and Payments Account Income and Expenditure Account

1. It is Real Account 1. It is a Nominal Account 2. It starts with opening balance 2. It does not start with opening balance. 3. It ends with closing balance either cash in hand or at bank.

3. It ends with a surplus excess on income over expenditure. or deficit excess of expenditure over incomes.

4. It is similar to Cash Book. 4. It is similar to profit and loss account. 5. Receipts are shown on the debit side and payments are shown on the credit side.

5. Expenses or losses are shown on the debit side and incomes and gains are shown on the credit side.

6. It contains both Capital and Revenue items.

6. It contains only Revenue items.

7. It includes receipts and payments whether they relate to any period past, previous and subsequent.

7. It included only revenue items of the current year only.

8. No adjustments are made for obtaining or prepaid incomes and expenses.

8. It takes into account the outstanding expenses and incomes.

9. Generally, it is not followed by Balance Sheet.

9. It is followed by Balance Sheet.

10. This is based on Cash system of accounting.

10. This is based on mercantile system.



212

12.4.4. Distinction between Income and Expenditure Accounts and Profit and Loss Accounts.

The Income and Expenditure Account of a Non – trading concern is similar to Profit and Loss Account of a trading concern. However, the following differences may be noted.

1. The Income and Expenditure Account is prepared by a Non- Trading concern while Profit and Loss Account is prepared by a trading concern.

2. Income and Expenditure shows Surplus of Deficit while Profit and Loss Account shows Net Profit or Net Loss.

3. Income and Expenditure Account does not start with Gross Profit or Gross Loss while Profit and Loss Account starts with Gross Profit or Gross Loss.

4. The Surplus or Deficit. shown in the Income and Expenditure is added or deducted. to from Capital Fund and is not distributed among the owners: whereas the Net Profit shown in the Profit and Loss Account is distributed among the owners.

12.4.5. Balance Sheet:

Balance sheet in case of non – trading concern is prepared in the usual manner and consists of all liabilities and assets on the date on which it is prepared. The excess of assets over liabilities is termed Capital Fund or General Fund. Again, The Capital Fund are accumulated with Capital Receipts,. Receipts that are capitalised and further increased by surplus or decreased by deficit, during the year. At the inception of a non – trading concern, there will be no formal Capital Fund and in such case, the Surplus, if any earned during the year constitute the Capital Fund at the end of the year.

12.5. ILLUSTRATIONS

12.5.1. Preparation of Receipts and Payments Account:

Illustration :1. From the following the details calculate amount of rent paid during the year ended 31.12.2007 to be transferred to Reciepts and Payments Accounts. Rs. Rent as per Income and Expenditure account 5,000

Rent outstanding as on 1.1.2007 2,000

Rent outstanding as on 31.12.2007 3,000

Rent prepaid as on 1.1.2007 2,500

Rent prepaid as on 31.12.2007 1,500

Solution : Calculation of amount of rent paid to be transferred to Receipts and Payments A/c for the year ending 31.12.2007.

Rent as per Income and Expenditure account 5,000

Add : Outstanding at beginning 2,000

7,000



213

Less : Outstanding at end 3,000

4,000

Add: Prepaid at end 1,500

5,500 Less: Prepaid at beginning 2,500

3,000

Illustration: 2. From the following the details calculate amount of subscriptions received during the year ended 31.12.2007 to be transferred to Reciepts and Payments Accounts. Rs. Subscriptions as per Income and Expenditure account 7,500

Subscriptions Subscriptions outstanding as on 1.1.2007 600

Subscriptions outstanding as on 31.12.2007 750

Subscriptions prepaid as on 1.1.2007 450

Subscriptions prepaid as on 31.12.2007 270

Solution :

Calculation of amount of Subscriptions received to be transferred to Receipts and Payments A/c for the year ending 31.12.2007.

Subscriptions as per Income and Expenditure account 7,500

Add : Outstanding at beginning 600

8,100

Less : Outstanding at end 750

7,350

Add: Prepaid at end 270

7,620

Less: Prepaid at beginning 450

7,170

Illustration: 3 Prepare Receipts and Payments A/c of a club for the year ended 31 st Dec

2007 from the following particulars: Rs

Opening balance of cash 40,000

Receipt of entrance fees 8,000

Subscriptions received for 2007 16,000

Previous year’s subscription 1,600



214

Paid salaries 2,000

Paid for miscellaneous expenses 200

Rent paid 1,200

Purchase of cricket balls

500

Purchase of cricket bats

1,600

Purchase of stationery

100

Solution: Receipts and Payments Account for the year ended 31 st Dec 2007.

Receipts Rs. Payments Rs To Balance b/d 40,000 By Rent 1,200 To Entrance fees 8,000 By Cricket balls 500 To Subscription: By Cricket bats 1,600 For 2007 By Stationery 100 For 2006 By Salaries 2,000 17,600 By Miscellaneous Expenses 200

By Balance c/d 60,000

65,600 65,600

12.5.2. Preparation of Income and expenditure Account:

Illustration: 4. From the following the details calculate amount of salary is to be transferred to Income and Expenditure Account for the year ended 31.12.2007. Rs Salary paid as per Receipts and Payments Account 3,250

Salary Outstanding as on 1.1.2007 450

Salary Outstanding as on 31.12.2007 500

Salary prepaid as on 1.1.2007 300

Salary prepaid as on 31.12.2007 400

Solution:

Calculation of amount of Salary to be transferred to I & E A/c for year ending 31.12.2007.

Rs. Salary as per Receipts and Payments 3,250

Add: Salary outstanding at the end 500

3,750

Less: Salary Outstanding at the beginning 450

3,300

Add: Salary prepaid at the beginning 300



215

3,600

Less: Salary prepaid at the end 400

3,200

Illustration: 5 From the following the details calculate amount of subscriptions received during the year ended 31.12.2007 to be transferred to Income and Expenditure Accounts.

Subscription as per Receipts and Payments Account 10,000

Subscriptions outstanding as on 1.1.2007 2,000

Subscriptions outstanding on 31.12. 2007 4,000

Subscription received in advance as on 1.1.2007 3,000

Subscriptions received in advance as on 31.12.2007 2,000

Solution: Calculation of amount of Subscription received to be transferred to Income & Expenditure Account for the year ending 31.12.2007.

Subscriptions as per Receipts & Payments Account 10,000

Add: Subscription outstanding at the end 4,000

14,000

Less: Subscription outstanding at the beginning 2,000

12,000

Add: Subscriptions received in advance at the beginning 3,000

15,000

Less : Subscriptions received in advance at the end 2,000

13,000

Illustration: 6. From the following the details calculate amount of stationery to be transferred to Income and Expenditure Accounts.during the year ended 31.12.2007

Amount of stationery as per Receipts and payments Account 1,750

Stock of stationery 1.1.2007 150

Stock of stationery on 31.12.2007 415

Creditors for stationery on 1.1.2007 370

Creditors for stationery on 31.12.2007 300

Paid advance for stationery 1.1.2007 250

Paid advance for stationery 31.12.2007 200



216 Solution: Calculation of amount of stationery to be transfered to Income & Expenditure account for the year ended 31.12.2007

Rs Stationery as per receipts and Payments Account 1,750 Add: Stock of stationery at the opening 150 1,900 Less : Stock of stationery at the end

415 1,485 Add: Outstanding at the end

300 1,785 Less : Outstanding at the beggining

370 1,415 Add: Prepaid in the beginning 250 1,665 Less: Prepaid at the end 200 1,465

Illustration: 7. From the following Receipts & Payments Account and additional informations of a sports club for the year ending 31.12.2007. Prepare Income & Expenditure Account for the same period.

Rs Rs To Balance b/d 1,125 By Newspaper 750 To Subscriptions 2,900 By Rent 250 To Tournament Fund 750 By Salaries 1,800 To Membership 1,000 By Office Expenses 1,200 To Entrance Fees 100 By Sports Equipments 1,150 To Donations for Building 1,500 By Tournament Expenses 450 To Sales of Newspaper 50 By Balance c/d 1,825 7,425 7,425

Subscriptions outstanding on 31 st December 2006 Rs. 450 and on 31 st December 2007 Rs.400. Subscriptions received includes Rs. 100 on account of the year 2008 Sports equipment was valued on 31 st December 2006 at Rs. 550 and on 31 st December 2007 are Rs.1,090 Office expenses include Rs. 150 for 2006 whereas Rs. 200 is still payable on this account for 2007 Tournament Fund is treated as Capital Receipt.



217 Solution:

Income and Expenditure Account for the year ended 31 st December 2007.

Expenditure Rs Income Rs To Newspaper 750 By Subscriptions 2,900 To Rent 250 Less: o/s in begining 450 To Salaries 1,800 2,450 To Office Expenses 1,200 Add: o/s at the end 100 Less: o/s in begining 150 2,850 1,050 Less: Received in advance 100 2,750 Add: o/s at the end 200 1,250 By Entrance Fees 100 To Depreciation Equipment 610 By Sale of Newspaper 50 By Deficit 1,760 4,660 4,660

Illustration: 8. From the following Receipts and Payments Account of a club and from the information supplied, prepare an income and Expenditure Account for the year ended 31 st December 2007.

Rs Rs To Balance b/d 350 By Salaries 1,400 To Subscriptions By General Expenses 300 2006 250 1,800 By Electric charges 200 2007 1,000 By Books 500 2008 200 1,450 By Newspaper 400 To Rent Received from hall 700 By Balance c/dishonoured 200 To Profit from Entertainment 400 To Sale of Newspaper 100 3,000 3,000

Additional Information:

a. The club has 50 members each paying an annual subscriptions of Rs.25 subscriptions outstanding on 31 st December 2006 were Rs. 300

b. On 31 st December 2007, salaries outstanding amounted to Rs.100 Salaries paid in 2007 included Rs. 300 for 2006.

c. On 1.1.2007, the club owned Building valued at Rs.10, 000, Furniture Rs.1,000 and Books Rs.1,000

d. Provide depreciation on Furniture at 10% [



218 Solution:

Income and Expenditure for the year ended 31 st December 2007.

Expenditure Rs Income Rs To Salaries 1,400 By Subscriptions 50 x 25. 1,250 Add: o/s at the end 100 By Rent of Hall 700 1,500 By Profit from Entertainment 400 Less: o/s at the end 300 1,200 By Sales of Newspaper 100 To General Expenses 300 To Electric Charges 200 To Newspaper 400 To Depreciation Furniture. 100 To Surplus 250 2,450 2,450

12.5.3. Preparation of Balance Sheet : Illustration: 9. Following is the information given in respect of certain items of a sports club. You are required to show them in the Balance Sheet of the Club as on 31.12.2007.

Rs Sports Fund as on 1.1.2007 10,000 Sports Fund Investments 10,000 Interest on Sports Fund Investments 1,000 Donation for Sports Fund 4,000 Sports Prizes Awarded 3,000 Expenses on Sports Events 1,000 General Fund 20,000 General Fund Investments 20,000 Interest on General Fund Investment 2,000

Solution: Balance Sheet as on 31.12.2007.

Liabilities Amount Assets Amount Sports Fund 10,000 Sports Fund Investment 10,000 Add : Interest 1,000 General Fund Investments 20,000 Add: Donations 4,000 Interest Outstanding 1,000 15,000 Less : Sports Prizes

3,000 12,000 Less :Expenses on Events 1,000

11,000 General Fund 20,000 31,000 31,000

Illustration: 10. The following is the Receipts and Payments A/c of Delhi Football Association for the first year ending 31 st Dec. 2007.

Receipts Rs Payments Rs. To Donation 50,000 By Pavilion office 40,000 To Reserve fund Life membership fees and entrance fees received.

4,000 By Expenses in connection with matches

900



To Receipts from football matches

8,000

By Furniture

219

2,100 To Revenue Receipts : By Investment at cost 16,000 Subscriptions 5,200 By Revenue Payments: Locker Rents 50 Salaries 1,800 Interest on Securities 240 Wages 600 Sundries 350 Insurance 350 Telephone 250 Electricity 110 Sundry expenses 210 By balance on hand 5,520 67,840 67,840 Additional Information:

i. Subscriptions outstanding for 2007 are Rs. 250. ii. Salaries unpaid for 2007 are Rs.170. iii. Wages unpaid for 2007 are Rs. 90 iv. Outstanding sundry expenses is Rs. 40. v. Donations received have to be capitalised.

Prepare Income and Expenditure A/c for the year ended 31.12.2007 and the Balance sheet of the Association as on that date.

Solution : In the Books of Delhi Football Association

Income and Expenditure A/c for the year ended 31 st Dec. 2007.

Expenditure Rs Income Rs To Salaries 1,800 By Subscriptions 5,200 Add: Outstanding 170 1,970 Add: Outstanding 250 5,450 To Wages 600 By Rent of lockers 50 Add: Outstanding 90 690 By Interest on Securities 240 To Telephone 250 By Sundries 350 To Electricity 110 To Insurance 350 To Sundry expenses 210 Add: Outstanding 40 250 To Surplus 2,470 6,090 6,090

Balance Sheet as on 31.12.2007.

Liabilities Rs Rs. Assets Rs. Rs. Capital Fund 50,000 Pavilion office 40,000 Add: Surplus 2,470 52,470 Furniture 2,100 Reserve Fund 4,000 Investments 16,000 Match Fund Receipts 8,000 Cash in hand 5,520 Less: Expenses 900 7,100 Subscriptions due 250 Outstanding Expenses: Salaries 170 Wages 90 Sundry expenses 40 300

63,870 63,870



220 Illustration : 11 Prepare Income and Expenditure Account and Balance Sheet for the following Receipts and Payments Account and Balance sheet as on 31 st December 2007.

Rs Rs To Balance b/d 10,000 Expenses 2006 1,200 To Subscriptions 2007 2,000 2006 200 By Land 4,000 2007 2,100 By Interest 400 2008 100 2,400 By Miscellaneous Expenses 2,000 To Entrances fees 800 By Balance c/d 8,300 To Lockers Rent 700 To Miscellaneous Income 4,000 17,900 17,900

Balance Sheet as on 31 st December 2006

Liabilities Rs Assets Rs Capital Fund 33,620 Building 30,000 Subscriptions received in advance 600 Outstanding Subscriptions 380 Outstanding Expenses 1,400 Outstanding Locker Rent 240 Loan 5,000 Cash 10,000 40,620 40,620

Solution:


Expenditure Rs Income Rs To Expenses 2,000 By Subscriptions 2,100 To Interest 400 Add: Received in advance 600 2,700 To Miscellaneous Expenses 2,000 By Entrance Fees 800 To Surplus

3,560 By Lockers Rent 700 Less : Received for 2006 240

460

By Miscellaneous Income 4,000 7,960 7,960

Balance sheet as on 31 st December 2007.

Liabilities Rs Assets Rs O/S Expenses Rs.1400 -1,200. 200 Cash 8,300 Subscriptions in advance 100 O/S Subscriptions Rs.380 - 200. 180

Add : Excess of Income 3,560 37,180 Land 4,000

Loan 5,000 Building 30,000 42,480 42,480



221 Illustration: 12. From the following information relating to Cricket club, prepare Income and Expenditure Account for the year ended 31st March 2007. Balance Sheet as at 31 st March 2007.

Receipts Rs Payments Rs To Members Subscriptions 50,000 By Upkeep of Field and Pavilion 20,000 To Members Admission Fees 3,000 By Expenses for Tournament 7,000 To Sale of old Balls, Bats etc 500 By Rate & Insurance 2,000 To Hire of Ground 3,000 By Telephones 500 To Subscriptions of Tournament 10,000 By Printing and Stationery 1,000 To Cash drawn from bank 40,000 By General Expenses 500 To Expenses 1,00,000 By Honorarium to secretary 1,700 By Grass seeds 300 By Bats, Balls etc 7,000 By cash deposited into Bank 1,66,500 2,06,500 2,06,500

Assets as on 1 st April 2006.

Cash in Bank 30,000 Stock of Balls Bats etc 15,000 Printing and stationery 2,000 Subscription due 5,000 Liabilities Nil

Donations received and surplus on account of V.J. Tournament should be kept in Reserve for a permanent Pavilion. Subscriptions due at 1 st March 2007 were Rs.7,500. Write off 50% of Bats, Balls Account and 25% of Printing and Stationery Account.

Solution:

Income and Expenditure Account for the year ended 31 st March 2007.

Expenditure Rs Income Rs To Upkeep of Field and Pavilion 20,000 By Member’s Subscriptions 50,000 To Rates and Insurance 2,000 Less: o/s at the begining 5,000 To Telephones 500 45,000 To General Expenses 500 Add: o/s at the end 7,500 52,500 To Honorarium to Secretary 1,700 By Admission Fees 3,000 To Grass Seeds 300 By Sale of Old Balls, Bats etc 500 To Dep on Printing and Stationery By Admission Fees 3,000 2,000 +1,000 = 3,000 x25%. 750 By Sale of Old Balls, Bats etc 500 To Depreciation on Bats, Balls By Hire of Ground 3,000 15,000 +7,000 = 22,000x50%. 11,000 To Surplus 22,250 59,000 59,000

Balance Sheet as on 31 st March 2006

Liabilities Rs Assets Rs Capital Fund 52,000 Cash in Bank 30,000 Stock of Bats, Balls etc 15,000 Printing and Stationery 2,000



Subscriptions Due

222

5,000 52,000 52,000

Balance Sheet as on 31 st March 2007.

Illustration: 13. Following are the assets and liabilities of on 31 st December 2006.

Liabilities Rs Assets Rs O/s Creditors for Expenses 650 Cash 3,200 Capital Fund Surplus. Furniture 4,850 44,350 O/S Subscriptions 750 O/S Rent of Lecture Hall 350 Library Books 16,850 Investments 5,000 Buildings 14,000 45,000 45,000

Receipts and Payments A/c for the year ended 31.12.2007.

Rs Rs Balance b/dishonoured 3,200 Salaries 2,400 Entrance Fees 2,600 Municipal Taxes 700 Subscriptions 8,500 Insurance on Buildings 500 Receipts from sale of furniture 600 Books Purchased 1,250 Receipts from sale of newspaper 60 Payment to creditors 650 Rent of Library Hall 1,040 Repairs 250 Proceeds from lectures 3,000 Electric fittings 4,500 Printing and Stationery 400 Postal Charges 50 Sundry Expenses 150 Balance c/d 8,150 19,000 19,000

It was found out at the end of the year that amounts to be received for subscriptions were Rs.1,100 and for use of library hall were Rs.375, prepaid insurance on building was Rs.175 and outstanding sundry expenses were Rs.80. Provide for depreciation 2 ½ % on building and write of 5 % on investments and 10% on the opening amount of library books.

Liabilities Rs Assets Rs Capital Fund 52,000 Cash at bank Add: Excess of Income 22,250 74,250 30,000 +1,66,500-40,000. 1,56,500 Reserve for pavilion Subscription Outstanding 7,500 1,00,000+10,000-7,000.

1,03,000 Stock of Printing and Stationery 3,000

Less: Depreciation 750 2,250 Stock of Bats, Balls etc. 22,000 Less: Depreciation 11,000 11,000 1,77,250 1,77,250



223 Whole of the entrance fee is to be treated as revenue income. Prepare Income and

Expenditure Account and Balance Sheet for the year ending at 31 st December 2007.

Solution: Income and Expenditure Account for the year ended 31.12.2007.

Expenditure Rs Income Rs To Salaries 2,400 By Entrance fees 2,600 To Municipal Taxes 700 By Subscriptions 8,500 To Insurance on building 500 Add :o/s at the end 1,100 Less : Prepaid 175 325 9,600 To Repairs 250 Less : o/s in begng 750 8,850 To Printing & Stationery 400 By Rent of Library Hall To Postal Charges 50 1040 +375-350. 1,065 To Sundry Expenses 150 Add: Outstanding 800

950

By Sale of Old Newspaper

60

To Dep on Building 350 By Proceeds from Lectures 3,000 To Dep on Books 1,685 To Dep on Investments 250 To Surplus 8, 215 15,575 15,575


Liabilities Rs Assets Rs Outstanding Sundry Expenses 800 Cash 8,150 Capital Fund 44,350+8,215. 52,565 Debtors Subscription o/s 1,100 +375. 1,475 Investments 5,000-250. 4,750

Library Books 16850-1685 +1250.

16,415

Furniture 4,850-600. 4,250 Electric Fittings 4,500 Prepaid Insurance 175 Building 14,000 - 350. 13,650 53,365 53,365

Illustration:14. From the following Trial Balance and accompanying notes for adjustments, prepare Income and Expenditure Account for the year ended 31 st December 2007 and the Balance Sheet as on that date of a club:

Rs Rs Club Buildings 37,400 - Library Books 2,280 - Furniture and Fixtures 3,520 - Glass, Cutlery etc. 1 st Jan 2007. 2,000 - Printing and Stationery 1,000 - Printing and Stationery 225 - Rent Received - 10,370 Annual Subscriptions - 12,150



Entertainment cost

345

224 -

Billiard Room Receipts - 3,845 Billiard Board 10,400 - Billiard Room Expenses 2,135 - Canteen Profit - 1,200 Subscriptions arrears on 1 st Jan 2007. 1,125 - Honorarium 1,500 - Sales of tickets for Annual Dinner - 1,600 Annual Dinner Expenses 1,875 - Salaries of Staff 2,700 - Donations - 8,500 Audit Fees 600 - Repairing , Clearing etc. 350 - Newspaper and Magazines 180 95 Interest on Bank Deposit - 25 Bank Charges 20 - Entrance Expenses - 225 Stock of canteen provision on 31 st December 2007 2,995 - Sundry Creditors 300 - Cash in Hand - 3,135 Cash in Bank 1,400 - General Fund 1,735 - - 32,940 74,085 74,085

Notes for adjustments:

(a) Out of the total subscriptions, Rs.1,125 represented arrears collected and Rs.760 paid in advance.

(b) An amount of Rs.500 was outstanding on account of rent. (c) Unpaid salary amounts to Rs.200 (d) Entrance fees to be capitalised. (e) Out of the donation, Rs.3,600 represented donation towards election expenses and of

the balance , half the amount shall be capitalised. (f) Depreciation to be provided as under :

Library Books at 10% Furniture and Fixtures at 15% Club Buildings at 5 % Glass, Cutlery etc. Rs.1,700 Solution :


Expenditure Rs Income Rs To Printing and Stationery

225

By Rent Received 10,370

To Entertainment Cost 345 Add : Outstanding 500 10,870 To Billiard Expenses 2,135 By Annual Subscription 12,150 To Honorarium 1,500 Less: O/s begining 1,125



225 To Dinner Expenses

1,875

11,025

To Salaries 2,700 Less: Prepaid at the end 760 10,265 Add: Outstanding 200 2,900 By Billiard Room receipts 3,845 To Audit Fees 600 By Canteen Profit 1,200 To Repairs 350 By Sale of tickets 1,600 To Newspaper etc 180 By Donations 8,500 To Bank Charges

20 Less: Election Expenses

3,600

To Depreciation: 4,900 Library Books 228 Less: Capitalised 2,450 2,450 Furniture 528 By Newspaper etc 95 Club Buildings 1,870 By Interest on Bank 25 Glass, Cutlery etc 1,700 4,326 To Surplus 15,894 30,350 30,350


Liabilities Rs Assets Rs Subscription in Advance 760 Cash in Hand 1,400 Outstanding Salary 200 Cash in Bank 1,735 Sundry Creditors 3,135 Stock of Canteen Provision 300 Donation 3,600 Rent Outstanding 500 Less : Election Expenses 2,995 605 Library Books 2,280 Capital Fund : Less: Depreciation 228 2,052 Entrance Fees 225 Glass, Cutlery etc. 2,000 General Fund 32,940 Add: Purchased 1,000 Add: Donation Capld 2,450 3,000 35,615 Less: Depreciation 1,700 1,300 Add: Surplus 15,894 51,509 Furniture and Fixtures 3,520 Less: Depreciation 528 2,992 Billiard Board 10,400 Club Building 37,400 Less: Depreciation 1,870 35,530 56,209 56,209

12.5.4. Accounting for professionals:

Illustration: 15. Mr. Perumal who is doctor commenced practice on 1 st January 2007 with a cash of Rs.1,00,000. At the end of the year the following details of his receipts and payments are available.

Rs Rs To cash Introduced 1,00,000 By Furniture 10,000 To Fees Received 50,000 By Equipments 25,000 To Receipts from Dispensing 1,20,000 By Drugs 24,000 To Miscellaneous Receipts 1,000 By Assistant’s Salary 10,000 By Rent 12,000 By Stationery 500 By Electricity 1,000



By Journals

226

900 By Drawings 36,000 By Cash at Bank 1,50,000 By Cash in Hand 1,600 2,71,000 2,71,000

Other information: Fees Rs.5,000 are still to be received. Salary to assistant unpaid Rs.750. Creditors for drugs purchased Rs.10,000. Stock of drugs still in hand Rs.5,000. Depreciate furniture and equipment by 10% p.a. Prepare final accounts.

Solution:


Rs Rs To Drugs Consumed : By Fees Received 50,000 Paid 24,000 Add : Outstanding 5,000 55,000 Add : Outstanding 10,000 By Clinical Fees 1,20,000 34,000 By Misc. Receipts 1,000 Less : Stock 5,000 29,000 To Salaries 10,000 Add : Outstanding 750 10,750 To Rent 12,000 To Stationery 500 To Electricity 1,000 To Journals etc 900 To Fees outstanding 5,000 To Dep on Furniture 1,000 To Dep on Equipments 2,500 To Surplus 1,13,350 1,76,000 1,76,000

Balance Sheet as on 31.12.2007.

Liabilities Rs Assets Rs O/s Salary 750 Cash in Hand 1,600 O/s Creditors 10,000 Cash at Bank 1,50,000 Capital : 1,00,000 Fees Accrued 5,000 Add: Surplus 1,13,350 Less : Provision 5,000 2,13,350 Drugs Stock 5,000 Less : Drawings 36,000 1,77,350 Furniture 10,000 Less: Dep 1,000 9,000 Equipment 25,000 Less: Dep 2,500 22,500 1,88,100 1,88,100



227 12.6. Let Us Sum Up:

In this lesson we have discussed meaning and specific terms relating to non trading organisations, accounting procedure for preparation of receipts and payments account, income and expenditure account and balance sheet followed by sufficient number of unsolved problems. 12.7. Lesson End Activities : 12.7.1. Preparation of Receipts and Payments Accounts :

Exercise :1. Coimbatore Club is started on January 1, 2007. During the year ending 31 st December, 2007, its receipts and payments were as under:

Receipts:

Rs Subscriptions 3,500 Donations 1,200 Payments : Investments 1,500 Rent 900 Printing & Stationery 250 Salary 360 Postage 80 Sundries 310

On December 31, 2007, Cash and Bank Balance were Rs.50 and Rs.1250 respectively. Prepare Receipts and Payments A/c for the year 2007.

Exercise : 2. From the following particulars taken from the Cash Book of a club, prepare a Receipts and Payments Account.

Rs Opening Balance : Cash in Hand 100 Cash at Bank 500 Receipts : Subscriptions 3,300 Donations 260 Payments : Investment Purchased 1,000 Rent – paid 400 General Expenses 210 Postage and Stationery 70 Sundry Expenses 30 Closing Cash Balance 20 12.7.2. Preparation of Income and Expenditure Account Exercise : 3. From the following extracts of the Receipts and Payments Account and the additional information, you are required to compute the income from subscriptions for the year ending 31.12.2007.

Receipts Amount

Rs. Payments Amount Rs.

To Subscriptions : 2006 1,800 2007 10,000



2008 4,000

Additional Information:

i. Subscriptions outstanding as on 31.12.2006: Rs 2,000 ii. Subscriptions outstanding as on 31.12.2007: Rs.3,000 iii. Subscriptions received in advance as on 31.12.2006: Rs.2,000

228 Exercise: 4. From the following details, ascertain the amount of subscriptions to be credited to income and expenditure account for the year ended 2007.Subscription received in 2007Rs. 48,000, which included Rs.4,000 for 2006 and Rs.8,000 for 2,000. Subscriptions due but not received at the end of the year 2007 were Rs.20,000. Subscriptions received in 2006 in advance for 2007 were Rs.12,000. Exercise: 5. On 31.12.2006, Subscriptions out standing were Rs.10,000 and received in advance for 2001 Rs.8,000. During 2007, subscriptions received were Rs.80,000 including Rs.7,000 towards the dues of the year 2006. On 31.12.2007, total subscriptions outstanding were Rs.12,000 and received in advance for 2008 Rs.6,000. You are required to show. Subscriptions to be credited to Income and expenditure A/c.

Exercise: 6. Compute the expenditure to be shown in Income and Expenditure Account for the following:

A. Sports materials purchased for cash 20,000 Opening stock of sports materials 5,000 Closing stock of sports materials 8,000 Opening creditors for sports materials 7,000 Cash paid to creditors for sports materials 22,000 Closing creditors for sports materials 6,000

Exercise: 7. The Calcutta sports club gives you the following Receipts and Payments A/c for the year ended 31 st Dec. 2007

Receipts Rs Payments Rs. To Cash in hand 150 By Ground men’s fees 1,500 To Cash at bank 2,100 By Mowing machine 1,100 To Subscriptions 5,800 By Rent 500 To Tournament fund 1,500 By Salaries to coaches 3,600 By Tournament Expenses 900 To Life membership 2,000 By Office expenses, 1,400 To Entrances fees 200 By Sports equipment 1,220 To Donations for pavilion 3,000 By Cash in hand 350 To Sale of grass 100 By Cash at Bank 3,300 14,850 14,850

Additional information: i. Subscriptions due on 31.12.2006 and on 31.12.2007 were Rs. 900/- and Rs. 800/- respectively. ii. Subscriptions received also include subscription for 2008 Rs.200/- iii. Sports equipment on hand on 31.12.2006 was Rs. 1,100/- the value placed on the equipment on hand on 31.12.2007 was Rs. 1,300/- iv. The moving machine was purchased on 1.7.2007 and is to be depriciation @ 20% per annum. v. Office Expenses include Rs. 300/- for 2006 and Rs. 400/- are still due for payment.



vi. Tournament receipts and expenses are to be seperated from general incomes and expenses.Prepare income and expenditure for the year 2007. Exercise : 8. From the following particulars, prepare Income and Expenditure A/c of the Central Sports society for the twelve months from April 2006 date of inception. to March 31, 2007.

Particulars

229

Rs Subscription from members 4,600 Subscription from affiliated societies 1,400 Life Subscription 10years. 2,000 Gifts received 3,000 Interest received 160 Committee Expenditure Executive 1,500 Planning 1,440 Tournament 420 Printing, Postage & Stationery 1,140 Office furniture 2,000 Investment purchased 3,000 Outstanding subscription affiliated. 200 Outstanding committee expenditure Executive 200 Planning 640 Tournament 120 Outstanding Printing etc 160

Exercise: 9. The following is the Receipts and Payments A/c of the Young club in respect of the year to 31 st Dec 2007.

Receipts Rs Rs. Payments Rs Rs To Balance b/d 20,500 By Salaries 41,600 To Subscriptions : By Stationery 8,000 2008 1,600 By Rates 12,000 2007 42,200 By Telephone 2,000 2006 800 44,600 By Investments 4%. 25,000 To Sports Profit 31,000 By Sundry expenses 18,500 To Dividend 20,000 By Balance c/d 9,000 1,16,100 1,16,100

Additional information : i. There are 450 members each paying an annual subscription of Rs.100/-. Rs. 900/-being arrears for 2006 at the beginning of 2007. ii. Stock of Stationery at 31.12.2006 was Rs. 1000/- ; at 31.12.2007 Rs. 1800/-. iii.At 31.12.2007, the rate were prepaid to the following 31 st March, the yearly charge being Rs. 12,000/-. A quarter’s charge for telephone is outstanding the amount accrued being Rs. 700/-. Expenses accruing at 31.12.2006 Rs. 1,400/-. iv. At 31.12.2006, the building stood in the books at Rs. 2,00,000 and it is required to write off depreciation at 5% per annum.Investments at 31.12.2006 were Rs. 4,00,000/- . You are required to prepare an income and expenditure account for the year ended 31.12..2007 and a balance sheet as that date.



12.7.3. Preparation of Balance Sheet:

Exercise: 10 Receipts and payments A/c and Income and Expenditure A/c of Asiatic Public Library for the year ended 31 st Dec 2007 were as follows:

Receipts Rs Payments Rs To Balance b/d 700 By Books Purchased 33,000 To Subscriptions :

By Printing & Stationery

230

1,500 2006 4,000 By Salaries for 2007 8,000 2007 30,000 By Salaries for 2006 2,000 2008 2,000 36,000 By Telephone charges 1,500 To Int Rs.200 for 2006. 4,000 By Misc. Expenses 3,000 To Donations for specific fund 5,000 By Balance c/d 200 To Rent : 2007 2,500 2008 1,000 3,500 49,200 49,200

Expenditure Rs Income Rs

To Salaries 12,000 By Interest 3,800

To Priniting & Stationery 1,500 By Subscriptions 35,000

To Telephone charges 1,500 By Rent 2,500

To Misc. Expenditure 3,000

To Depreciation on :

Books 5,000

Buildings 5,000

Furniture 1,000 11,000

To Surplus 12,300

41,300 41,300

On enquiry you find that the Library has the following other assets on 1.1.2007.

Buildings 2,00,000 Furniture 10,000 Books 17,000 Investments 38,000 You are asked to prepare Balance Sheet of the library as on 31.12.2006 and 31.12.2007.

Exercise : 11. The following particulars related to sports clubs of Delhi Income and Expenditure Account for the year ended 31st December 2007.



231 Receipts and payments Account for the year ended 31 st Dec 2007.

On 1 st January 2007, the club had the following assets: Land and Buildings 60,000 Sports Equipments 30,000 Furniture 4,500 Prepare Opening and Closing Balance Sheets.

Exercise: 12. Following is the Receipts and Payments Account of Sail Club for the year ended December 31, 2007.

Receipts Rs Payments Rs Balance b/d : Salaries to Secretary 6,000 Cash 2,000 Salaries to Staff 5,000 Bank 12,000 14,000 Canteen expenses 12,000 Subscriptions Miscellaneous expenses 2,500 For 2006 500 Construction of building 15,000 For 2007 5,500 Balance c/d: For 2008 400 6,400 Cash 1,300 Interest from Bank 1,000 Bank 4,000 5,300 Sale of old newspaper 400 Sale of old furniture 2,000 Canteen collection 12,000 Donation Building. 10,000 45,800 45,800

With the additional information given below, prepare the Income and Expenditure Account for the year ended 31 st December 2007 and the Balance sheet as on that date :

31 st Dec. 2006 31 st Dec. 2007 Rs. Rs.

Rs Rs

To Salaries 6,000 By Admission Fees 15,000

To Print and Stationery 2,500 By Subscriptions 25,000

To Advertising 1,000 By Rent Receivable 4,800

To Insurance Charges 900

To Electric Charges 500

Rs Rs To Balance b/d 5,000 By Salary 7,500 To Admission Fee : By Printing 2,500 2006 2,500 By Advertising 1,000

2007 13,500 16,000 By Insurance charges

1,200

To Subscriptions By Electricity 500 2006 1,000 By Fixed assets 20,000 2007 23,000

By Balance b/dishonoured

17,900

20058 2,000

26,000

To Rent 3,600 50,600 50,600



a. Subscriptions receivable 1,000 600 b. Subscription received in advance 200 400 c. Salary of staff outstanding 1,000 2,000 d. Canteen expenses prepaid 1,000 1,500 e. Furniture at book value 14,000 ? f. Buildings 15,000 ? g. Fixed deposit with bank 10,000 10,000 h. Book value if furniture sold during 2007 was Rs.3,500 i. Charge depreciation on furniture at 10 per annum on the closing balance.

232 12.7.4.Accounting for Professionals:

Exercise : 13. Following are the accounts of Dr. Sankaran for the year ending 31.12.2007.

Amounts still receivable on account of visits and dispensing are Rs.1,000 and Rs.600 respectively. Salary of Assistant still payable is Rs.200. 40% of conveyance is for domestic purpose. Stock of drugs still on hand is Rs.800 amount still payable for their purchase is Rs.200. Furniture & Equipment are both subject to depreciation at 10%. Prepare the Income and Expenditure Account of Dr. Sankaran for 2007 and his balance sheet as on 31.12.2007.

12.8. MODEL ANSWERS TO CHECK YOUR PROGRESS :

Ex: 1. Receipts and Payments Balance 3500 +1200. = 4700 1500 +900+250+360+80+310+50+1250. = 4700

Ex: 2. Receipts and Payments Balance. 600+3300+260. – 1000 + 400+210+70+30+20. = 2450

Ex: 3. Amount of subscription in Income and Expenditure Account 1000 + 3000 – 200 + 2000 = 14800

Ex: 4. Amount of subscription in Income and Expenditure Account 48000 – 4000 – 8000 + 20000 + 12000. = 68000

Ex: 5. Amount of subscription in Income and Expenditure Account 80000+9000+8000 – 7000 – 6000. = 84000

Receipts Rs Payments Rs To Capital Introduced 5,000 By Furniture 2,000 To Visits 16,000 By Equipment 2,500 To Receipts from Dispensing 10,000 By Purchase of Drugs 3,000 To Miscellaneous Receipts 100 By Salary of Assistant 2,000 By Rent 1,500 By Conveyance 1,000 By Stationery 100 By Lighting 150 By Journals 250 By Drawings 12,000 By Balance c/dishonoured 6,600 31,100 31,100



Ex: 6. Amount of Sports materials in Income & Expenditure Account 6000 + 22000- 7000 + 20000 + 5000 – 8000. = 38000

Ex: 7. Balance from Income and Expenditure Account 1500 + 500 + 3600 + 2500 + 1000 + 110. – 5800 – 90+800 – 200 - 200+100. = 3410

233 Ex: 8. Balance from Income & Expenditure Account

4600 +1400 + 200 + 200+ 3000+ 160 . – 1700 + 2080 + 540 + 130. 3940

Ex: 9. Balance of Income & Expenditure Account 42200 + 2800 + 31000 + 20000. – 41600 + 7200 + 12000 + 2700 + 17100 + 10000. = 5400

Ex: 10. Opening Balance Sheet 700 + 38000 + 4000 + 200 + 10000 +17000 +200000. – 2000 = 267900

Closing Balance Sheet

Liabilities : 267900 + 12300 + 2000 + 1000 + 4000+ 5000. = 292200

Assets : 200 + 38000 + 5000+ 45000 + 9000 + 195000. = 292200

Ex: 11. Balance of Opening Balance Sheet 5000+1000+2500+30000+4500+60000. = 103000 Closing Balance Sheet

Liabilities: 2000 + 103000 + 21900 = 126900

Assets : 17900 + 2000 + 1500 + 1500 + 1200 + 300 + 18000 + 4500 + 20000 + 60000= 126900

Ex: 12. Balance from opening Balance Sheet 2000 + 12000+10000+15000+14000+1000+1000. – 1000 + 200. = 53800

Subscription Amount: 6400 + 200 + 600 – 1000 – 400. = 5800

Balance from Income & Expenditure Account 6000 + 6000 + 2500 + 1500 +1050.- 5800+500+1000+400. = 9350

Closing Balance Sheet:

Liabilities: 53800 – 9350 + 400 + 2000+ 10000 = 56850

Assets : 1300 + 4000 + 10000 + 9450 + 30000 +600 + 1500 = 56850

Ex: 13. Balance from Income and Expenditure Account: 800 +100 +10600 + 17000. – 600 +2200+1500 +100 + 150 + 250 +3200 +450 + 1600. = 18450

Closing Balance Sheet: Liabilities : 5000 + 18450 – 12400 + 200 + 200 = 11450 Assets : 1800 + 2250 + 6600 + 800 = 11450 12.9 References: Financial Accounting – R.L. Gupta – Sultan chand & Sons Advanced Accounting – S.N. Mageswari – Vikas Publishers.

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234

Model Question Paper -1

Principles of Accountancy

Time : 3 Hours Max. Marks: 100 Answer any Five Questions 20 x 5 = 100.

1. Explain various accountings concepts and conventions. 2. Write Short Note on : i. Steps involved in accountings ii. Difference between Journal and Ledger. iii. What are the errors that are not disclosed by tiral balance. iv. Distinguish between Receipts and Payments Account and Income & Expenditure Account. 3. The Following is the Trial Balance of Mr. Jayaraman Agencies as on 31 st March 2007. Prepare Trading and Profit and Loss Account for the year ended 31 st March 2007 and a Balance Sheet as on that date : Rs. Rs. Capital 1,00,000 Buildings 15,000 Drawings 18,000 Motor Van 25,000 Furniture 7,500 Loan from Mr. A @ 12% 15,000 Interest Paid 900 Sales 1,00,000 Purchases 75,000 Opening Stock 25,000 Establishment 15,000 Wages 2,000 Insurance 1,000 Commission 7,500 Sundry Debtors and Creditors 28,100 10,000 Bank 20,000 2,32,500 2,32,500 Adjustments : Closing Stock Rs. 32,000. Outstanding wages Rs. 500. Prepaid Insurance Rs. 300. Commission received in advance Rs. 800. Interest on capital 10% p.a. Depreciate building by 2.5%, furniture by 10% and motor van by 10%. Interest on drawings Rs. 500. 4. A consignment of 10,000kg of tea, costing Rs 50 per kg sent on consignment on 1 st February 2007 to an agent, on commission of 5% on gross sales.The following expenses are incurred:

(c) By the Consignor : Freight and Insurance 2,000 Dock charges and Sundry Expenses 800

(d) By the Consignee : Godown Rent and Insurance 800 Miscellaneous Expenses 1,400



235 Some packages containing 2,000kg of tea were damaged in transit and the contents

had to be destroyed on landing as having become unfit for sale. 7,000kg of tea were sold at Rs 60 and on 28 th February 2007. The date of closing of accounts, the balance of the consignment remained unsold in stock. Prepare necessary ledger Account. 5. A, B and C enter into a joint venture to divide profits equally. They bought goods from D for Rs.12, 500 and from A for Rs.25, 000. A contributed Rs.30, 000, B Rs.40, 000 and C Rs.90, 000 which amounts were banked in a joint account. They settled their account with D by cheque and paid for carriage and other expenses Rs.7, 500. They sold goods for cash Rs.65, 000 and to E on credit for Rs.1, 40, 000 who accepted a draft for the amount. The acceptance was cashed and realizes Rs.1, 37, 000. A was allowed 5% commission on sales for effecting the transactions. Pass necessary journal entries and open accounts, assuming that the final settlement between parties was made by cheque. 6. From the following Receipts & Payments Account and additional informations of a sports club for the year ending 31.12.2007. Prepare Income & Expenditure Account for the same period.

Rs Rs To Balance b/d 1,125 By Newspaper 750 To Subscriptions 2,900 By Rent 250 To Tournament Fund 750 By Salaries 1,800 To Membership 1,000 By Office Expenses 1,200 To Entrance Fees 100 By Sports Equipments 1,150 To Donations for Building 1,500 By Tournament Expenses 450 To Sales of Newspaper 50 By Balance c/d 1,825 7,425 7,425

Subscriptions outstanding on 31 st December 2006 Rs. 450 and on 31 st December 2007 Rs.400. Subscriptions received includes Rs. 100 on account of the year 2008 Sports equipment was valued on 31 st December 2006 at Rs. 550 and on 31 st December 2007 are Rs.1,090 Office expenses include Rs. 150 for 2006 whereas Rs. 200 is still payable on this account for 2007 Tournament Fund is treated as Capital Receipt. 7. On 1 st January 2007, Prem owed Rs. 5,400 to Kamal. Prepare an Account Current to be rendered by Kamal for the period up to 30 th June 2007. The following transactions have taken place between

them during the period of six months. Rs. Jan.1 Sold goods to Prem 800 Jan.16 Received form Prem 2,000 Jan.25 Sold to Prem, goods on credit for one month 1,000 Feb.10 Received three months acceptance from Prem 2,000 March 1 Bought goods to Prem 1,500 April 20 Sold goods to Prem 500 May.7 Prem bought goods 1,200 June 9 Remitted by Prem 800 June 14 Received form Prem 900

Interest is to be charged at an agreed rate of 6% p.a



236 8. Answer all the questions given below: 4 x 5 = 20. 8.1. Jouranlis the following transactions in the books of Miss Amudha. Rs.

01.01.2007 Amudha commenced business with cash 50,000 02.01.2007 Purchased goods for cash 10,000 05.01.2007 Purchased goods from Mohan on credit 6,000 07.01.2007 Paid into Bank 5,000 10.01.2007 Purchased furniture 2,000 20.01.2007 Sold goods to Suresh on credit 5,000 25.01.2007 Cash sales 3,500 26.01.2007 Paid to Mohan on account 3,000 31.01.2007 Paid salaries 2,800

8.2. Raman owes Balan the following sums of money due on the dates stated: Rs. 400 due on 5th January 2004 Rs. 200 due on 20th January 2004 Rs. 800 due on 4th February 2004 Rs. 100 due on 26th February 2004 Rs. 50 due on 10th March 2000

Calculate Average Due Date 8.3. Prepare a bank reconciliation statement from the following data as on 31.12.2007

Rs. a. Balance as per cash book 12,500 b. Cheques issued but not presented for payment 900 c. Cheques deposited in bank but not collected 1,200 d. Bank paid insurance premium 500 e. Direct deposit by a customer 800 f. Interest on investment collected by bank 200 g. Bank charges 100

8.4. On March 10 th, A sold goods to B a Bill at three months for Rs. 800, which B accepts immediately and returns it to A. The Bill is honoured on the due date. Pass entries in the books of both A and B.

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237

Model Question Paper -II


Time : 3 Hours Max. Marks: 100 Answer any Five Questions 20 x 5 = 100. 1. What is mean by errors ? What are the different types of errors ? Discuss different stages involved in the rectification of errors. 2. Write short note on: i. Methods of accounting ii. Accounting conventions iii. Distinction between joint venture and partnership iv. Basic rules for journal. 3. Form the following Trial Balance and the adjoining information provided by Mr. Logesh, prepare a Trading and Profit and Loss Account for the year ending 31 st March 2007 and a Balance Sheet as on that date : Dr. Rs Cr. Rs Land and Buildings 20,000 Machinery 50,000 Furniture 4,000 Opening Stock 16,300 Purchases 80,000 Salaries 6,000 Carriage on sales 1,500 Freight on purchases 2,000 Customs duty on purchases 3,000 Advertising 5,400 Wages 20,000 Rent 3,000 General Expenses 3,200 Postage and Stationery 1,500 Repairs to Machinery 2,000 9% Loan to Krishna 5,000 Prepaid Insurance 200 Sundry Debtors 20,000 Cash at Bank 3,350 Capital 80,000 Sundry Creditors 8,000 Discount received 400 Outstanding expenses 1,550 Sales 1,50,500 Provision for Repairs 6,000 2,46,450 2,46,450 Adjustments : i. Stock on 31st March 2007 amounted Rs. 14,900. ii. Machinery worth Rs. 10,000 was purchased on 1st October 2006. Wages Rs. 500 were paid to workmen for its installation which have been debited to wages account. iii. Depreciation is to be written off @ 3% on Land and Buildings 10% Machinery and 5% on Furniture. iv. Provision for repairs is to be credited with Rs. 1,500 every year.



238 4. Smith of Mysore consigned 100 machines costing Rs 50,000 to their agent Ashok of Chennai at 20% above the cost to be sold on behalf of Consignor. Consignor incurred Rs 50 for packing and other charges on each machine. Ashok received consignment by paying Rs 500 as railway charges and spent Rs 50 for carriage to godown. He rendered an Account Sales showing that:

20 Machines realised Rs 12,000 in each. 50 Machines sold on credit at Rs 650 each. 10 Machines taken to his own stock at Rs 610 each.

Consignee remitted the balance after deducting her commission at 5% on invoice price of goods sold and 15% on any excess price realised. Show the Consignment Account. 5. A and B, both contractors, undertook a joint venture involving the construction of a building. A Joint Bank Account was opened in which a contributed Rs. 75,000 and B contributed Rs. 37,500. The contract price was Rs. 3, 75,000. The result of joint venture was shared as to a 2/3 and B 1/3. The details of the transactions were as follows.

Rs. Wages paid 89,000 Materials supplied by A 13,500 Materials supplied by B 12,000 Materials purchased 1,65,000 Salaries 12,000 Architect fee paid by A 18,500 Concrete mixer plant purchased 38,500

The stock materials on the completion of the contract, valued at Rs. 16,500, were taken over by A. Concrete mixer plant was taken over by B for Rs. 30,000. A was to be paid Rs. 18,000 p.a against establishment expenses, to be charged to the Joint Venture Account. The contract lasted for 8 months. Pass Journal Entries and prepare Joint Venture Account, Joint Bank Account and Accounts of A and B.

6. Prepare Income and Expenditure Account and Balance Sheet for the following Receipts and Payments Account and Balance sheet as on 31 st December 2007.

Rs Rs To Balance b/d 10,000 Expenses 2006 1,200 To Subscriptions 2007 2,000 2006 200 By Land 4,000 2007 2,100 By Interest 400 2008 100 2,400 By Miscellaneous Expenses 2,000 To Entrances fees 800 By Balance c/d 8,300 To Lockers Rent 700 To Miscellaneous Income 4,000 17,900 17,900


Liabilities Rs Assets Rs Capital Fund 33,620 Building 30,000 Subscriptions received in advance 600 Outstanding Subscriptions 380 Outstanding Expenses 1,400 Outstanding Locker Rent 240



Loan

5,000

Cash

239

10,000 40,620 40,620

7. Prepare a Bank Reconciliation Statement on 31 st December 2007. i. A's overdraft as per Pass Book was Rs. 31st December 2007 was Rs. 12,000 ii.On 30th December cheques had been issued for Rs. 7,000 of which cheques worth

Rs. 3,000 only had been encashed upto 1 31st December. iii. Cheques amounting to Rs. 3,500 had been paid into the bank for collection but of

these only Rs. 500 had been credited in the Pass Book. iv.The bank charged Rs. 500 as interest on overdraft, the intimation of which has been

received on 2 January 2007. v. The Bank Pass Book shows account credit for Rs. 1,000 representing Rs. 400 paid by a

debtor of A direct into the bank and Rs. 600 collected direct by the bank in respect of interest on A’s investments. A had no knowledge of these items.

vi. A cheque for Rs. 200 had been debited in bank column of Cash Book by A, but it had not been sent to Bank.

8. Answer all the questions given below: 4 x 5 = 20. 8.1. Journalise the following transactions of Miss. Banu for the year 2007.

Rs. Jan 1 Banu commenced business with cash 30,000 Jan 2 Paid into bank 21,000 Jan 3 Purchased goods by cheque 15,000 Jan 7 Drew cash from bank for office use 3,000 Jan 15 Purchased goods from Siva 15,000 Jan 20 Cash sales 30,000 Jan 25 Paid to Siva 14,000 ” Discount Received 250 Jan 31 Paid rent 500 ” Paid Salaries 2,000

8.2. A Partner has withdrawn the following sums of money during the half year ending 30.06.2007. January 15 Rs. 300 April 20 Rs. 400 February 18 Rs. 250 May 16 Rs. 300 March 10 Rs. 150 June 18 Rs. 500 March 26 Rs. 200 Interest is to be charged at 8% p.a. Find out the average due date and calculate the amount of interest to be debited to the partner. 8.3. The following balances are extracted from the books of Miss.Dhivya. Prepare trial balance as on 30.12.2007.

Particulars Rs. Capital

Cash in hand

Building

Stock

4,70,000

6,000

3,20,000

33,000



Sundry creditors

Commission paid

Rent & Taxes

Purchases

Salaries

Discount allowed

Drawings

Bad debts

240

26,000

750

6,300

1,65,000

70,600

650

5,000

1,350

Machinery

Sundry Debtors

Repairs

Insurance premium

Sales

Telephone charge

Furniture

Discount earned

Loan from Mohammed

Reserve fund

Bills receivable

Bills payable

1,58,800

48,000

5,400

3,300

2,90,000

6,450

11,000

1,100

51,000

5,900

8,600

6,000

8.4. Mr. Ravi draws a Bill for Rs. 2,000 on Gopal on 15 th September for three months. On maturity, Gopal failed to honour the Bill. Pass the necessary journal entries in the books of Ravi and Gopal, if he had retained the Bill with him till maturity.



241

Model Question Paper -III


Time : 3 Hours Max. Marks: 100 Answer any Five Questions 20 x 15= 100. 1. What is mean by bank reconciliation statement? Explain reasons neccessating preparation of bank reconciliation statement 2. Write short note: i. Advantages of account ii. Accomodation bills iii. Errors of principle iv. Features of Accountings. 3. From the following Trial Balance of Mr. Naveen prepare a Trading and profit and Loss Account for the year ended December 31, 2007 and a Balance Sheet as on that date : Dr. Rs Cr. Rs Capital 4,250 Drawings 710 Plant & Machinery 950 Stock on 1st January 1,460 Purchases and Sales 10,362 11,906 Purchases and Sales returns 210 291 General Expenses 440 Rent 120 Rates 200 Apprentice Premium 80 Bank overdraft 240 Bank Debts 172 Debtors & Creditors 4,200 2,000 Cash on hand 48 Bad Debts reserve 105 18,872 18,872 Adjustments: Depreciate Plant & Machinery at 10% p.a. Increase bad debts reserve to 5% on sundry debtors. Rent accrued in Rs. 40 Rates of Rs. 80 are paid in advance. Stock on hand as on 31st December is Rs. 1,700. Apprentice premium received in advance is Rs. 20 4. On 1 st January 2007, A of Delhi consigned to B of Amritsar goods for sale at invoice price. B is entitled to commission of 3 per cent on invoice price and 20 per cent of any surplus price realised. Goods costing Rs. 12,000 were consigned to Amristar at the invoice price of Rs. 14,400. The expenses of consignment amounted to Rs. 1,000. On 31 st March 2003, an Account Sales was received from B showing that she had effected sales of Rs. 12,000 in respect of 3/4 th of the quantity of goods consigned to him. His actual out of pocket expenses were Rs. 600. B accepted a bill drawn by A for Rs. 5,000 and remitted the balance due from him in cash. Prepare the necessary ledger accounts in the books of the consignor. 5. Bharat and Sharad joined together as co-ventures for equal share in profits through sale of television cabinets. On March 31, 2003, Bharat purchased 2,000 cabinets at Rs. 250 each for cash and sent 1,500 of these to Sharad for sale, the selling price of each being Rs. 300. All the cabinets were sold by April 30, 2003 by both and the proceeds collected. Each venture record in his books only those transactions concluded by him, final profit/loss being ascertained through account Memorandum Joint Venture Account.



242 The expenses met by the ventures were:

Bharat Freight and insurance 9,000 Selling expenses 4,500 Sharad Wages 900 Selling expenses 13,500

Final settlement between the ventures took place on May 31, 2003. You are required to show the ledger accounts under Memorandum Method. 6. From the following Trial Balance and accompanying notes for adjustments, prepare Income and Expenditure Account for the year ended 31 st December 2007 and the Balance Sheet as on that date of a club:

Rs Rs Club Buildings 37,400 - Library Books 2,280 - Furniture and Fixtures 3,520 - Glass, Cutlery etc. 1 st Jan 2007. 2,000 - Printing and Stationery 1,000 - Printing and Stationery 225 - Rent Received - 10,370 Annual Subscriptions - 12,150 Entertainment cost 345 - Billiard Room Receipts - 3,845 Billiard Board 10,400 - Billiard Room Expenses 2,135 - Canteen Profit - 1,200 Subscriptions arrears on 1 st Jan 2007. 1,125 - Honorarium 1,500 - Sales of tickets for Annual Dinner - 1,600 Annual Dinner Expenses 1,875 - Salaries of Staff 2,700 - Donations - 8,500 Audit Fees 600 - Repairing , Clearing etc. 350 - Newspaper and Magazines 180 95 Interest on Bank Deposit - 25 Bank Charges 20 - Entrance Expenses - 225 Stock of canteen provision on 31 st December 2007 2,995 - Sundry Creditors 300 - Cash in Hand - 3,135 Cash in Bank 1,400 - General Fund 1,735 - - 32,940 74,085 74,085



243

Notes for adjustments:

(g) Out of the total subscriptions, Rs.1,125 represented arrears collected and Rs.760 paid in advance.

(h) An amount of Rs.500 was outstanding on account of rent. (i) Unpaid salary amounts to Rs.200 (j) Entrance fees to be capitalised. (k) Out of the donation, Rs.3,600 represented donation towards election expenses and of

the balance , half the amount shall be capitalised. (l) Depreciation to be provided as under :

Library Books at 10% Furniture and Fixtures at 15% Club Buildings at 5 % Glass, Cutlery etc. Rs.1,700 7. Mani has accepted the following bills drawn by Sharma :- On 08.03.2007 Rs. 8,000 for 4 months

On 16.03.2007 Rs. 10,000 for 3 months

On 07.04.2007 Rs. 12,000 for 5 months

On 17.05.2007 Rs. 10,000 for 3 months

He wants to pay all the bills on a single day. Find out this date. Interest is charges at 18% p.a. and Mani wants to save Rs. 300 by way of interest. Find out the date on which he has to effect the payment to save interest of Rs. 300. 8. Answer all the questions given below: 4 x 5 = 20. 8.1. The following are a series of transactions between A and B for the three months ending on 31 st March 2007. Calculate the amount of interest to be payable by one party to the other @ 10% p.a.

Rs. Jan.1 Opening balance Dr. 5,000 Jan.10 Sold goods to B 10,000 Jan. 15 Cash received from B 10,000 Feb.15 Sold goods to B 10,000 March.1 Cash received from B 5,000

8.2. Journalise the folllowing transactions of Miss. Chitra and post them in the ledger and balance the same relating to June 2007.

1 Chitra invested Rs. 5,00,00 cash in the business.

3 Paid into Bank Rs. 80,000

5 Purchased building for Rs. 3,00,000

7 Purchased goods for Rs. 70,000



244

10 Sold goods for Rs. 80,000

15 Withdrew cash from bank Rs. 10,000

25 Electricity Charges Rs. 3,000

31 Salaries Rs. 15,000

8.3. From the following particulars of Mr. Bhagawan, prepare Manufacturing Account for the year ended 31 st December 2007.

Rs. Rs. Purchase of raw materials 13,195 Interest Bank Loan 600 Returns Inward 70 Stock, 1 st Jan. 2007 Stock on 31st Dec. 2007 Raw Materials 400 Raw Materials 1,210 Work-in-progress 300 Work-in-progress 1,000 Finished Goods 410 Finished Goods 1,370 Sales 19,500 Productive Wages 2,000 Returns Outward 85 Factory Expenses 1,840 Carriage Outward 105 Office Expenses 300 Carriage Inward 100 Salaries 600 Discount Allowed 10 Distributing Expenses 100 Sale of Scrap 20 Selling Expenses 700 Depreciation on Machinery 500 Purchase Expenses 600 Repairs to Machinery 100 Export Duty 300 Depreciation on Office furniture 40 Import Duty 200 8.4. On 15 th June, Niranjan sold goods to Prema, valued at Rs. 2,000. He drew a Bill at 3 months for the amount and discounted the same with his bankers at Rs. 1,960. On the due date, the Bill was dishonoured and Niranjan paid the bank the amount due plus the noting charges of Rs. 10. Pass the journal entries in the books of the two parties.

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245

Solutions to Model Question Paper-I

Q.No. 1. Refer Paras 2.1and 2.2 Q.No. 2. i. Refer Para 1.7 ii. Refer Para 3.2.2 iii. Refer Para 4.3.6 iv. Refer Para 12.3.3 Q.No. 3. Refer Page No. 78, Illustration No. 22 Q.No. 4. Refer Page No. 154, Illustration No. 6 Q.No. 5. Refer Page No. 174, Illustration No. 1 Q.No. 6. Refer Page No. 216, Illustration No. 7 Q.No. 7. Refer Page No. 141, Illustration No. 5 Q.No. 8. i. Refer Page No. 35, Illustration No. 1 ii. Refer Page No. 123, Illustration No. 1 iii. Refer Page No. 196, Illustration No. 3 iv. Refer Page No. 111, Illustration No. 1

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246

Solutions to Model Question Paper-II

Q.No. 1. Refer Paras 4.1, 4.3 and 4.4 Q.No. 2. i. Refer Para 1.11 ii. Refer Para 2.2 iii. Refer Para 10.4 iv. Refer Para 3.1.2 Q.No. 3. Refer Page No. 81, Illustration No. 24 Q.No. 4. Refer Page No. 158, Illustration No. 9 Q.No. 5. Refer Page No. 178, Illustration No. 4 Q.No. 6. Refer Page No. 220, Illustration No. 11 Q.No. 7. Refer Page No. 203, Illustration No. 12 Q.No. 8. i. Refer Page No. 37, Illustration No. 2 ii. Refer Page No. 125, Illustration No. 4 iii. Refer Page No. 41, Illustration No. 4 iv. Refer Page No. 112, Illustration No. 5

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247

Solutions to Model Question Paper-III

Q.No. 1. Refer Paras 11.1and 11.2 Q.No. 2. i. Refer Para 1.3 ii. Refer Para 6.5.8 iii. Refer Para 4.3.3 iv. Refer Para 3.3.6 Q.No. 3. Refer Page No. 84, Illustration No. 26 Q.No. 4. Refer Page No. 161, Illustration No. 12 Q.No. 5. Refer Page No. 186, Illustration No. 8 Q.No. 6. Refer Page No. 223, Illustration No. 14 Q.No. 7. Refer Page No. 129, Illustration No. 10 Q.No. 8. i. Refer Page No. 139, Illustration No. 1 ii. Refer Page No. 38, Illustration No. 3 iii. Refer Page No. 70, Illustration No. 14 iv. Refer Page No. 113, Ill ustration No. 6

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LIST OF IMPORTANT ACCOUNTING TERMS

1. Accounting : The process of recording, classifying, analyzing and

communicating the financial transactions. 2. Account : A clear record of transactions affecting a person or an

asset or profit or loss. 3. Book Keeping : Recording of financial transactions in a systematic manner.

4. Transaction : Transfer of money’s worth from one account to another account

5. Debit : An account which receives the benefit from a transaction. 6. Credit : An account which gives the benefit from a transaction. 7. Debit an a/c : A command to record a transaction on the left hand side of an

account . 8. Credit an a/c : A command to record a transaction on the right hand side of an account. 9. Debtor : A person who owes money to the business. 10. Creditor : A person to whom the business owes money. 11. Journal : A date wise record of the transactions with details of the accounts debited and credited and the amount of each transactions. 12. Narration : A brief explanation of the transactions with necessary details written under each journal entry within brackets. 13. Ledger : A book containing all the accounts which are transferred from journal and subsidiary books. 14. Subsidiary books : The division of journal entries into various books on the basis of nature of transactions. 15. Personal a/c : An account containing details about the transactions with a living natural person. 16. Impersonal a/c : An account containing details about the transactions with any account other than persons. 17. Real a/c : An account which contains details about real things owned by the business.

GLOSSARY



18. Nominal a/c : An account which contains details about expenses, losses, incomes and gains. 19. Capital : Amount invested by the proprietor in the business. 20. Drawings : Amount taken from the capital of the business for the personal purposes of the proprietor. 21. Capital Expenditure : Amount paid for the purchase of assets. 22. Revenue Expenditure : Amount paid for the purchase of goods. 23. Capital Receipts : Amount received from sale of assets etc. 24. Revenue Receipts : Amount received on account of sale of goods etc. 25. Double Entry System : An accounting system based on the principle “for every debit

there must be correspondent credit of equal amount and vice versa”.

26. Single Entry System : An accounting system used to prepare final accounts from the

various incomplete records prepared by ignoring double entry system.

27. Invoice : A business document prepared by seller on the occasion of

credit sales of goods containing details about name, date, quantity and price.

28. Debit Note : A business document prepared by buyer on the occasion of

purchase returns containing details about name, date, quantity and price.

29. Credit Note : A business document prepared by seller on the occasion of

sales returns containing details about name, date, quantity and price.

30. Receipt : An acknowledgement for cash received from other persons for

business dealings. 31. Voucher : An evidence document for the payment of cash to other party

for business dealing.

11

32. Purchases Book : A book containing details about credit purchase of goods

disclosing details about name, date, quantity and price.



33. Sales Book : A book containing details about credit sales of goods disclosing

details about name, date, quantity and price. 34. Bills Receivable : A bill of exchange received from the debtors an account of

credit sales. 35. Bills Payable : A bill of exchange issued to the creditors on account of credit

purchase. 36. B/R Book : A book containing the details of bills received from debtors. 37. B/P Book : A book containing the details of bills issued to creditors. 38. Cash Book : A book containing the details of cash received and paid during

a particular period. 39. Pass Book : A book containing the details of cash position in the bank

account of a trader. 40. Trade Discount : A deduction allowed by seller from the list price of the

goods on the occasion of large quantity of sales. 41. Cash Discount : A deduction allowed by seller to buyer at the occasion of cash

sale or prompt payment on credit sales. 42. Petty Cash Book : A book in which entries are made for the payment of sundry

day to day expenses in small amounts. 43. Imprest System : Maintaining a specific amount of cash balance in the

petty cash book permanently. 44. Trial Balance : A two sided balanced statement contain all the account

balances on a particular date. 45. Return Inwards : Sales returns 46. Return Outwards : Purchase returns 47. Carriage Inward : Transportation charges incurred on purchase of goods. 48. Carriage Outward : Transportation charges incurred on sale of goods.

49. Accounting : The basic principles or assumptions or conditions Concept upon which the accounting statements are prepared.

50. Accounting : The basic principles or customs or traditions on which the

Convention accounting statements are prepared. 51. Separate Entity : Assumption that business is a separate legal entity Concept distinct from its proprietor.



52. Going Concern : Assumption that business is intended to continue for an Concept indefinitely long period. 53. Convention of : Accounting principle that anticipate no profit and provide for Conservatism all possible losses. 54. Convention of : Accounting principle that methods of accounting remain Consistency constant atleast for a particular period. 55. Convention of : Accounting principle that the importance of and accounting Materiality treatment of particular transaction is based on the economic significance. 56. Error of Omission : Mistake of omitting a transaction to record in the books. 57. Error of : Mistake of entering a transaction at a different Commission amount in the books. 58. Error of Principle : Mistake of application of accounting concepts and conventions. 59. Error of : Occurrence of two errors which counter balance each other Compensation while balancing the books. 60. Depreciation : Decrease or Decline in the value of asset due to usage and passage of time. 61. Bad Debts : The debts which are definitely known to be irrecoverable. 62. Provision for Bad : Setting aside a specific amount or percentage on debtors Debts in respect of estimated bad debts. 63. Provision for : Setting aside a specified amount or percentage on debtors in Discount on Debtors respect of estimated discount. 64. Provision for : Provision for anticipated gain in respect of discount on sundry Discount on Creditors creditors. 65. Interest on Capital : Amount payable by the business concern to the proprietor at a given rate on the amount of capital. 66. Interest on : Amount payable by the proprietor to his business concern at Drawings a given rate on the amount of drawings. 67. Outstanding : Expenses remain unpaid at the end of the accounting year. Expenses 68. Prepaid Expenses : Expenses paid during the year but benefit remain unexpired on

the closing date.



69. Accrued Income : Income earned during the year but not yet received on the date of closing of accounts.

70. Income Received in: Income received during the year but service thereon remine

Advance incomplete at the date of the closing of the accounts. 71. Fixed Assets : Assets acquired for permanent use of the business. 72. Current Assets : Assets acquired for trading purpose. 73. Fixed Liabilities : Financial commitments payable after one year. 74. Current Liabilities : Financial commitments payable shortly with in one year. 75. Tangible Assets : Assets having physical existence such as land, buildings etc. 76. Intangible Assets : Assets not having physical existence such as patents, pattern

trade mark, good will, etc. 77. Fictitious Assets : Nominal assets exist only in the books of accounts such as

preliminary expenses etc. 78. Contigent Assets : An asset whose existence is depend upon the happening of

a certain even which may or may not take place. 79. Contigent Liabilities: A liabilities arise only on the happening of account certain even

which may or may not take place. 80. Negotiable : A written promise in a legal document as per, “Negotiable

Instrument Instruments Act. 1881”. 81. Bills of Exchange : An instrument in writing containing an unconditional order. 82. Cheque : A bill of exchange drawn on a specified bankers and not

expressed to be payable otherwise than on demand. 83. Promissory Note : An instrument in writing, not being the bank, contains an

unconditional undertaking. 84. Drawer : The person who draws or writes the bills of exchange. 85. Drawee : The person on whom the bill of exchange is drawn. 86. Payee : Person who has the right to receive the amount of bills of

exchange. 87. Maturity Date : The date on which a bill falls due for payment. 88. Bills Discounting : Sale of a bill to bank by the drawer or holder of the bill to

meet immediate financial commitment.



89. Bills Endorsing : Transfer of a bill by holder or drawer to any other

person except banker. 90. Endorser : The person transfer the bill to another. 91. Endorsee : The person to whom the bill is transferred from drawer or holder 92. Bill Honour : Settlement of bill of exchange promptly in time. 93. Bills Dishonour : Failure to settle the bill amount in due date. 94. Bills for Collection : Sending of the bill to the banker from the drawee by opening

the separate account. 95. Bills Renewal : Extension of bill date by drawer on the request of the drawee. 96. Bills Retirement : Settlement of bill amount before the bill date. 97. Notice of : Issue of notice through a Notary Public by drawer to drawee on Dishonour the occasion of dishonour. 98. Noting Charges : Charges payable for the services of Notary Public. 99. Accommodation : The bills drawn and accepted with no consideration passed or

Bills received. 100. Solvent : A person financially sound enough to discharge his liabilities. 101. Insolvent : A person whose liabilities are higher his assets and who is not

capable of discharging his liabilities in full. 102. Consignment : An agency agreement under which the manufactures transfer

goods to another person for making sales on commission basis. 103. Consignor : A person who transfer the goods under the agreement of

consignment. 104. Consignee : A person who receives the goods under the agreement of

consignee. 105. Account Sales : A accounting statement prepared by consignee for the

submission to the consignor. 106. Normal Loss : Loss of stock due to a loss which is unavoidable in nature. 107. Abnormal Loss : Loss of stock due to a loss which is not natural and

unavoidable. 108. Invoice price : Cost price plus a fixed percentage of profit on cost price.



109. Recurring : The expenses incurred after the goods have been received at Expenses consigninee godown.

110. Non recurring : The expenses incurred for bringing the books from the place of

Expenses the consignor to the place of consignee. 111. Delcredre : Additional commission payable to consignee to bear bad debts.

Commission 112. Joint venture : A temporary partnership agreement between two or more

persons to undertake a particular business. 113. Co-venturers : The parties to the joint venture agreement. 114. Average Due Date: The arithmetic average of several due dates. 115. Base Date : A starting date from which average due date is calculated. 116. Grace Days : Grace period of three days customarily by allowed on the due date of a bill of exchange. 117. Account Current : An account of the transactions between two parties during a

particular period in which interest is calculated at an agreed rate.

118. Forward Method : Counting of number of days for account current from date of

transaction to the closing date. 119. Backward Method: Counting of number of days for account current from date of

transaction to the closing date. 120. Periodical Balance: Counting of number of days for account current from date of

Method one transaction to date of another transaction. 121. Red-Interest : Amount of interest accrued for the period between closing date

and due date in the case of account current. 122. Trading Concern : A business concern established for the purpose of earning

profit. 123. Non Trading : A business concern which is not aimed at making profit. Concern 124. Receipts and : An account showing movement of cash for a particular period. Payment a/c 125. Income and : An accounting statement showing income and expenses of

Expenditure a/c a non-trading concern for a particular period.

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